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Share Name | Share Symbol | Market | Type |
---|---|---|---|
General Enterprise Ventures Inc (PK) | USOTC:GEVI | OTCMarkets | Common Stock |
Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|---|---|
-0.1225 | -17.01% | 0.5975 | 0.60 | 0.6999 | 0.74 | 0.5975 | 0.72 | 27,655 | 20:52:19 |
Filed
by the Company
x
|
Filed
by a Party other than the Company
o
|
Check
the appropriate box:
|
x
|
Preliminary
Proxy Statement.
|
o
|
Confidential,
for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2)).
|
o
|
Definitive
Proxy Statement.
|
o
|
Definitive
Additional Materials.
|
o
|
Soliciting
Material Pursuant to §240.14a-12.
|
GENERAL
ENVIRONMENTAL MANAGEMENT, INC.
|
|
(Name
of Company as Specified In Its Charter)
|
|
(Name
of Person(s) Filing Proxy Statement, if other than the
Company)
|
|
Payment
of Filing Fee (Check the appropriate box):
|
|
o
|
No
fee required.
|
x
|
Fee
computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
|
(1)
|
Title
of each class of securities to which transaction
applies:
|
|
(2)
|
Aggregate
number of securities to which transaction applies:
|
|
(3)
|
Per
unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (set forth the amount on which the filing fee
is calculated and state how it was determined):
The
filing fee is calculated based on $14,000,000 of aggregate consideration.
The purchase price payable under the Agreement is $14,000,000, and may be
reduced by a reasonable estimate of the Net Working Capital Deficiency
Amount and an amount defined as the Holdback Fund, as more fully described
in Sections 2.5 and 2.6 of the Agreement. Such obligations are
estimated to be $1,000,000.
|
|
(4)
|
Proposed
maximum aggregate value of transaction:
$14,000,000
|
|
(5)
|
Total
fee paid:
$781.20
|
x
|
Fee
paid previously with preliminary
materials.
|
o
|
Check
box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its
filing.
|
|
(1)
|
Amount
Previously Paid:
|
|
(2)
|
Form,
Schedule or Registration Statement No.:
|
|
(3)
|
Filing
Party:
|
|
(4)
|
Date
Filed:
|
1.
|
To
approve the sale of the Company's wholly owned subsidiary, General
Environmental Management, Inc. a Delaware corporation, pursuant to a
Agreement, dated as of November 25, 2009, by and between Luntz Acquisition
(Delaware), LLC. and the Company, a copy of which is attached as
Annex A
to the
accompanying proxy statement.
|
2.
|
To
consider and vote upon an adjournment of the Special Meeting, if necessary
for a period of not more than 30 days, to solicit additional proxies
if there are not sufficient votes at the time of the Special Meeting to
approve the Sale.
|
|
|
Page | |
QUESTIONS
AND ANSWERS ABOUT THE SPECIAL MEETING AND THE SALE
|
6 |
SUMMARY
OF THE SALE
|
11 |
Information
about the Parties
|
11 |
Summary
of the Sale
|
12 |
Recommendation
of Our Board of Directors
|
13 |
Reasons
for the Sale
|
13 |
Overview
of the Agreement
|
13 |
Material
U.S. Federal income Tax Consequences of the Sale
|
14 |
Required
Approvals
|
15 |
Anticipated
Accounting Treatment
|
15 |
Appraisal
Rights
|
15 |
RISK
FACTORS
|
16 |
Risks
Related to the Sale
|
16 |
Risks
Related to the Business after the Sale
|
17 |
CAUTIONARY
STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
|
26 |
THE
SPECIAL MEETING
|
27 |
Date,
Time and Place
|
27 |
Purposes
of the Special Meeting
|
27 |
Recommendation
of the Company’s Board of Directors
|
27 |
Record
Date and Voting Power
|
27 |
Voting
and Revocation of Proxies
|
28 |
Quorum
and Required Vote
|
29 |
Solicitation
of Proxies
|
29 |
Delivery
of Proxy Materials to Households Where Two or More Stockholders
Reside
|
29 |
Other
Matters
|
29 |
THE
SALE
|
30 |
Background
of the Sale
|
30 |
Reasons
for the Sale; Recommendations of the Company’s Board of
Directors
|
31 |
Buyer
and Parent
|
33 |
Required
Approvals
|
34 |
Material
U.S. Federal Income Tax Consequences of the Sale
|
34 |
Anticipated
Accounting Treatment
|
34 |
Appraisal
Rights
|
34 |
THE
AGREEMENT
|
35 |
Sale
of Purchased Interests and Liabilities to be Assumed
|
35 |
Assets
and Liabilities to be Retained by the Company
|
36 |
Purchase
Price
|
36 |
No
Solicitation of Conflicting Transaction
|
37 |
Conduct
of Business Pending the Completion of the Sale
|
37 |
Conditions
to the Completion of the Sale
|
38 |
Other
Agreements
|
41 |
Termination
of the Agreement
|
42 |
Effect
of Termination of the Agreement
|
42 |
Representations
and Warranties of the Company
|
43 |
Representations
and Warranties of the Buyer
|
48 |
Indemnification
|
49 |
Indemnification
by the Company
|
49 |
Indemnification
by the Buyer
|
49 |
Special
Indemnification Provision Regarding Environmental Matters
|
50 |
DESCRIPTION
OF GENERAL ENVIRONMENTAL MANAGEMENT, INC.
|
51 |
Page | |
DESCRIPTION
OF LUNTZ ACQUISITION (DELAWARE), LLC AND PSC ENVIRONMENTAL SERVICES,
LLC.
|
52 |
BUSINESS
|
53 |
Proposed
Sale to the Buyer
|
53 |
Overview
of Business
|
53 |
Company
Background
|
53 |
Business
Strategy Prior to the Sale
|
81 |
Governmental
Regulation
|
81 |
State and
Local Regulations
|
82 |
Industry
|
83 |
Products
and Services
|
84 |
Business
Operations
|
85 |
Marketing
|
87 |
Customers
|
87 |
Competition
|
88 |
Insurance
and Financial Assurance
|
88 |
Employees
|
89 |
Business
Strategy After the Sale
|
89 |
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
90 |
Business
Overview
|
90 |
Recent
Developments
|
91 |
COMPARISON OF THE
THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
|
92 |
COMPARISON OF THE
NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
|
93 |
UNAUDITED
PRO FORMA CONSOLIDATES FINANCIAL INFORMATION
|
95 |
MATTERS
BEING SUBMITTED TO A VOTE OF STOCKHOLDERS
|
103 |
Proposal
No. 1: Approval of the Sale
|
103 |
Proposal
No. 2: Approval of Possible Adjournment of the Special
Meeting
|
103 |
MARKET
PRICE AND DIVIDEND INFORMATION
|
104 |
PRINCIPAL
STOCKHOLDERS OF THE COMPANY
|
105 |
FUTURE
STOCKHOLDERS PROPOSALS
|
106 |
WHERE YOU
CAN FIND MORE INFORMATION
|
106 |
GENERAL
ENVIRONMENTAL MANAGEMENT, INC. CONSOLIDATED FINANCIAL
STATEMENTS
|
107 |
Annex
A: Stock Purchase Agreement
|
Attached |
Annex
B: Management Voting Agreement
|
Attached |
Annex
C: CVC Voting Agreement
|
Attached |
Q:
|
What proposal will be voted on
at the Company’s Special
Meeting?
|
|
|
A:
|
The
following proposals will be voted on at the Special
Meeting:
|
|
1.
|
The
proposal to be voted on is whether to approve the sale of the Company's
wholly owned subsidiary, General Environmental Management, Inc. a Delaware
corporation ("GEM DE") to Luntz Acquisition (Delaware), LLC. (“Buyer”)
pursuant to the terms of a Agreement, dated as of November 25, 2009, (the
"Agreement") attached as
Annex A
. See
the Section below entitled “The Sale” for a more detailed description of
the transaction with Buyer.
|
|
2.
|
The
second proposal to be voted on is whether to adjourn the meeting, if
necessary, for a period of not more than 30 days, to solicit
additional proxies if there are not sufficient votes in favor of the first
proposal
|
|
|
Q:
|
What
is the Company’s Board of Directors’ recommendation with respect to the
proposals?
|
A:
|
After
careful consideration, the Board of Directors (the "Board") has
unanimously approved the Sale and the Agreement and has determined that it
is advisable, fair to and in the best interests of the Company’s
stockholders. Accordingly, the Board unanimously recommends that
stockholders vote FOR the
proposals.
|
|
|
Q:
|
Why
does the Company’s Board of Directors believe the Sale is in the best
interests of the Company’s
stockholders?
|
A:
|
The
Company’s Board conducted a process to consider strategic alternatives and
the risks and challenges facing the Company in the future, and concluded
that the Sale was the best alternative for seeking to maximize value to
stockholders. See “The Sale—Reasons for the Sale; Recommendation of the
Company’s Board of Directors” for more
information.
|
|
|
Q:
|
What
factors were considered by the Company’s management and Board of Directors
in deciding to sell the stock?
|
A:
|
The
Company’s management and Board considered a number of factors before
deciding to enter into the Agreement, including, but not limited to, the
price to be paid by Buyer, the strategic alternative evaluation process
that led to entering into the Agreement, the Company’s business prospects
and the terms and conditions of the Agreement. The Board also considered,
and balanced against the potential benefits of the Sale, certain adverse
factors. See “The Sale—Reasons for the Sale; Recommendation of the
Company’s Board of Directors” for more
information.
|
|
|
A:
|
Buyer
and the Company have entered into the Agreement, which contains the terms
and conditions of the proposed Sale. Pursuant to the Agreement, the
Company has agreed, as a condition of the Sale, to: l ) form a Delaware
corporation that shall be wholly-owned by the Company and named GEM NewCo,
Inc. (“GEM NewCo”), b) form a Delaware limited partnership, the sole
limited partner of which shall be the Company, and the sole general
partner of which shall be GEM NewCo, which limited partnership shall be
named GEM Pomona LP (“GEM LP”), c) effect a merger between GEM LP and GEM
DE, whereby GEM LP will be the surviving entity, d) sell to Luntz the
limited partner interests of GEM LP and all of the outstanding shares of
stock of GEM NewCo (the “Purchased
Interests”).
|
A:
|
The
Company does not currently intend to distribute any of the proceeds from
the Sale or the Agreement to the Company’s
stockholders.
|
A:
|
The
Buyer is Luntz Acquisition (Delaware), LLC. Buyer is a Delaware private
limited liability company that is owned by PSC Environmental Services, LLC
(“PSC”).
|
|
PSC
and its subsidiaries, including Luntz Acquisition (Delaware), LLC are a
leading provider of integrated environmental services, operating a network
of facilities that spans the United States, Mexico and Puerto Rico.
PSC provides waste management services, lab pack,
transportation, household hazardous waste, e-waste, emergency
response, pollution prevention and retail
services.
|
A:
|
Buyer
has agreed to pay the Company $14.0 million. The purchase price will
be reduced by a reasonable estimate of a Net Working Capital Deficiency
Amount as defined in Section 2.5 of the Agreement, such that the net
working capital amount shall be zero. In addition an amount defined as the
Holdback Fund will be retained by Luntz for a period of one year, as
collateral for certain indemnification provisions of the
Agreement. Such amount is estimated to be
$1,000,000.
|
A:
|
If
the Company’s stockholders approve the Sale set forth in the Agreement,
the Company will consummate the sale of the purchased interests subject to
satisfaction or waiver of the closing conditions set forth in the
Agreement. The Company anticipates that the Sale will close on or before
March 1, 2009.
|
A:
|
The
net cash proceeds from the transaction will be used by the Company to
retire senior debt and other obligations of the Company, and to pursue its
announced strategy of participating in the water treatment and
waste-to-energy business. Total reduction in indebtedness to the Company’s
senior lender and other indebtedness could amount to more than $9
million. In addition, the Company will use $250,000 to pay its
obligations to United States Environmental Response, LLC, a California
limited liability company pursuant to which the Company has
purchased all of the issued and outstanding capital stock of California
Living Waters, Incorporated ("CLW"), a privately held company (the "CLW
Stock Purchase"). CLW owns all of the issued and outstanding
capital stock of Santa Clara Waste Water Company (“SCWW") a California
corporation. CLW's only operating subsidiary is SCWW. SCWW had
audited revenues of $4,581,722 and $7,615,880 in 2007 and 2008
respectively and had unaudited revenues of $5,291,866 for the first 10
months of 2009.
|
.
|
The
Company does not intend to go private or terminate its Securities Exchange
Act of 1934 (“Exchange Act”) reporting
obligations.
|
Q:
|
What
will happen if the Sale to Buyer is not approved or the Sale is not
completed for other reasons?
|
A:
|
If
the Sale to Buyer is not approved or if the Company does not complete the
Sale for other reasons, the Company will attempt to continue to execute
its current business strategy, provided the Company would be able to raise
additional capital to fund its operations. If the Company were
not able to raise additional capital, then the Company would have to make
a determination whether it would be able to continue in
business. Further, if the Company does not pay off its senior
lender by March 12, 2010, the Company's purchase of CLW is subject to
rescission.
|
|
|
A:
|
The
Company and Buyer must meet certain conditions or waive them prior to the
close of the Sale. The Company’s stockholders must approve the Sale. The
Company must also reaffirm the representations and warranties that are
contained in the Agreement, no proceeding or litigation may have been
initiated to prevent the closing of the Sale and other customary
conditions must be met. Buyer must also reaffirm the representations and
warranties that are contained in the Agreement. Further, there can be no
material adverse change in the Company’s financial condition, assets,
business or results of operations, and other customary conditions must be
met.
|
|
|
A:
|
The
Company will recognize a taxable gain on the Sale equal to the difference
between the amount realized from the Sale and the adjusted tax basis of
the assets sold and liabilities assumed. The Company expects to have
sufficient federal net operating losses to offset the gain expected to be
realized from the Sale for regular federal income tax purposes. The
Company will pay federal alternative minimum tax on the gain on Sale. The
Company will not be able to use California net operating losses to offset
the gain from the Sale because California suspended the use of net
operating losses in 2009. The Company expects to pay California regular
income tax on the gain on Sale.
|
|
|
A:
|
The
proposal to approve the Sale to Buyer requires the affirmative vote of
holders of a majority of the Company’s outstanding shares in order to be
approved by stockholders. An abstention or “broker non-vote” will have the
effect of a vote against the proposal to approve the Sale. In connection
with the execution of the Agreement, certain directors, executive officers
and their affiliates entered into stockholder voting agreements to vote
their shares of the Company’s common stock in favor of approval of the
Sale and against the approval or adoption of any alternative transactions.
These directors, executive officers and their affiliates also granted to
Buyer a proxy to vote their shares of the Company’s common stock in favor
of approval of the Sale and agreed not to transfer its shares of the
Company’s common stock prior to the expiration of the stockholder voting
agreements. These directors, executive officers and their affiliates
together own or control an aggregate of less than 1% of the Company’s
outstanding common stock. A copy of the voting agreement by the Company’s
management (the “Management Voting Agreement”) is attached as
Annex B
, and a copy of
the voting agreement by CVC California, LLC, (the “CVC Voting Agreement”)
our senior lender, is attached as
Annex
C
.
|
Q:
|
What
happens if we do not have a quorum or enough affirmative votes at the
Special Meeting?
|
A:
|
If
we do not have a quorum at the Special Meeting or if we do not have
sufficient affirmative votes in favor of the proposal, we may seek to
adjourn the Special Meeting to a later time to permit further solicitation
of proxies if necessary to obtain additional votes in favor of the
foregoing item. We may seek to adjourn the Special Meeting without notice,
other than by the announcement made at the Special Meeting. Under our
Bylaws, we can adjourn the Special Meeting by approval of the holders of a
majority of the shares of our common stock present in person or
represented by proxy at the Special Meeting and entitled to vote. We are
soliciting proxies to vote in favor of the adjournment of the Special
Meeting, regardless of whether a quorum is present, if necessary to
provide additional time of up to 30 days to solicit votes in favor of
approval of the Sale. If adjourning the Special Meeting does not enable a
quorum to be established, the proposal will not pass. Further, if
adjourning the Special Meeting does not enable us to attract sufficient
affirmative votes in favor of the proposal, such proposal will not
pass.
|
|
|
A:
|
You
are receiving this proxy statement because you have been identified as a
Company stockholder as of the record date for the Special Meeting, and
thus you are entitled to vote at the Special Meeting. This document serves
as a proxy statement of the Company, used to solicit proxies for the
Company’s Special Meeting of stockholders. This document contains
important information about the Sale and the Special Meeting of
stockholders, and you should read it
carefully.
|
|
|
A:
|
The
Company urges you to read this proxy statement carefully, including its
annexes, and to consider how the proposed Sale affects
you.
|
|
|
A:
|
The
failure to return your proxy card or otherwise provide proxy instructions
will have the same effect as voting against approval of the Sale, and your
shares will not be counted for purposes of determining whether a quorum is
present at the Special Meeting.
|
|
|
A:
|
If
your shares of Company common stock are registered directly in your name
with the Company’s transfer agent, you are considered with respect to
those shares to be the stockholder of record, and the proxy materials and
proxy card are being sent directly to you. If you are a Company
stockholder of record, you may attend the Special Meeting of stockholders
to be held on February __, 2010 and vote your shares in person, rather
than signing and returning your
proxy.
|
Q:
|
If
my Company shares are held in “street name” by my broker, will my broker
vote my shares for me?
|
A:
|
Your
broker will not be able to vote your shares without instructions from you.
You should instruct your broker to vote your shares, following the
procedure provided by your broker.
|
|
|
A:
|
Stockholders
of record, other than those stockholders who have executed a voting
agreement, may change their vote at any time before their proxy is voted
at the Special Meeting. Stockholders of record, other than stockholders
who have executed a voting agreement, can do this in one of three ways.
First, a stockholder of record can send a written notice stating that the
stockholder would like to revoke its proxy. Second, a stockholder of
record can submit new proxy instructions either on a new proxy card, by
telephone or via the Internet. Third, a stockholder of record can attend
the Special Meeting and vote in person. Attendance alone will not revoke a
proxy. If a stockholder of record has instructed a broker to vote its
shares, the stockholder must follow the directions received from its
broker to change those
instructions.
|
|
|
A:
|
The
Company will pay the cost of soliciting proxies, including the printing,
mailing and filing of this proxy statement, the proxy card and any
additional information furnished to stockholders. Arrangements will also
be made with brokerage firms and other custodians, nominees and
fiduciaries who are record holders of Company common stock for the
forwarding of solicitation materials to the beneficial owners of common
stock. The Company will reimburse these brokers, custodians, nominees and
fiduciaries for reasonable out-of-pocket expenses they incur in connection
with the forwarding of solicitation
materials.
|
|
|
A:
|
If
you would like additional copies, without charge, of this proxy statement
or if you have questions about the Sale, including the procedures for
voting your shares, you should
contact:
|
Buyer:
|
Parent:
|
Luntz
Acquisition (Delaware), LLC.
|
PSC,
LLC.
|
5151
San Felipe, Suite 1600
|
5151
San Felipe, Suite 1600
|
Houston,
TX 77056
|
Houston,
TX 77056
|
(713)
625-7019
|
(713)
625-7019
|
§
|
General
Environmental Management of Rancho Cordova, LLC, a California limited
liability company and the real property owned by General Environmental
Management of Rancho Cordova, LLC.
|
§
|
Island
Environmental Services, Inc., a California
corporation;
|
§
|
GEMWare
– proprietary software for managing environmental
services;
|
§
|
Service
contracts; and
|
§
|
Tangible
personal property;
|
§
|
$14
million in cash and assume $1.1 million of long term lease
obligations.
|
§
|
Restricted
cash ($900,046) for the financial closure assurance for the Rancho
Cordova, CA TSDF
|
§
|
California
Living Waters, Inc., and its wholly owned subsidiary Southern California
Waste Water Company.
|
•
|
the
representations and warranties of each party in the Agreement are true and
correct in all material respects as of the closing date of the
Sale;
|
•
|
the
Sale is approved by the Company
stockholders;
|
•
|
neither
the Company, GEM DE, or any of GEM DE’s subsidiaries shall have commenced
a voluntary proceeding seeking liquidation, reorganization or other relief
with respect to itself or its debts under any bankruptcy, insolvency or
other similar law;
|
•
|
no injunction
or other order or statute, rule, regulation or executive order by any
government entity prevents the completion of the
Sale;
|
•
|
all
required filings with governmental agencies are made and approvals of the
Sale, if any, are obtained.
|
§
|
encourage,
solicit, initiate, engage (including by way of furnishing or disclosing
information) or participate in any negotiations with any Person (other
than Buyer) concerning any merger, consolidation or other business
combination involving GEM DE, GEM DE’s subsidiaries, or acquisition of any
portion of their respective assets or business, or encourage, solicit,
initiate or entertain inquires or proposal concerning, or which could
reasonable be expected to lead to, any of the
foregoing;
|
§
|
negotiate
or take any other action intended or designed to facilitate the efforts of
any person other than Buyer relating to a possible acquisition
transaction;
|
§
|
enter
into any arrangements, agreements or understanding requiring any of them
to abandon, terminate or fail to consummate the transactions contemplated
by the Agreement.
|
·
|
that
a broker or dealer approve a person's account for transactions in penny
stocks; and
|
|
|
·
|
the
broker or dealer receive from the investor a written agreement to the
transaction, setting forth the identity and quantity of the penny stock to
be purchased.
|
|
·
|
sets
forth the basis on which the broker or dealer made the suitability
determination; and
|
|
·
|
that
the broker or dealer received a signed, written agreement from the
investor prior to the transaction.
|
|
·
|
Our
board of directors are authorized to issue of up to 100,000,000 shares of
preferred stock and to fix the rights, preferences, privileges and
restrictions of those shares without any further vote or action by the
stockholders, which may be used by the board to create voting impediments
or otherwise delay or prevent a change in control or to modify the rights
of holders of our common stock; and
|
|
·
|
Limitations
on who may call annual and special meetings of
stockholders.
|
•
|
may
significantly reduce the equity interest of
investors;
|
|
|
•
|
may
subordinate the rights of holders of common stock if we issue preferred
stock with rights senior to those afforded to our common
stock;
|
|
|
•
|
will
likely cause a change in control if a substantial number of our shares of
common stock are issued, which may affect, among other things, our ability
to use our net operating loss carry forwards;
and
|
|
|
•
|
may
adversely affect the market price for our common
stock.
|
|
|
•
|
default
and foreclosure on our assets if our operating revenues after a business
combination are insufficient to repay our debt
obligations;
|
|
|
•
|
acceleration
of our obligations to repay the indebtedness (even if we make all
principal and interest payments when due) if we breach certain covenants
that require the maintenance of certain financial ratios or reserves
without a waiver or renegotiation of that
covenant;
|
|
|
•
|
our
immediate payment of all principal and accrued interest, if any, if the
debt security is payable on demand;
and
|
|
|
•
|
our
inability to obtain necessary additional financing if the debt security
contains covenants restricting our ability to obtain such financing while
the debt security is outstanding.
|
|
greater
name recognition and larger marketing budgets and
resources;
|
|
|
established
marketing relationships and access to larger customer
bases;
|
|
substantially
greater financial, technical and other resources; and
|
|
|
larger
technical and support staffs.
|
§
|
the
ability of the Company to complete the proposed
Sale;
|
§
|
the
satisfaction of the conditions to consummate the Sale, including the
approval of the Sale by the Company’s
stockholders;
|
§
|
the
occurrence of any event, change or other circumstance that could give rise
to the termination of the
Agreement;
|
§
|
the
outcome of any legal proceeding that may be instituted against the Company
or others following the announcement of the
Agreement;
|
§
|
the
amount of the costs, fees and expenses related to the
Sale;
|
§
|
indemnification
amounts potentially payable by the Company in connection with the
Sale;
|
§
|
the
potential value created by the proposed Sale for the Company’s
stockholders;
|
§
|
the
Company’s results of operations, financial condition and businesses, and
the expected impact of the Sale on the Company’s financial and operating
performance; and
|
§
|
general
industry, market and competitive
conditions.
|
|
|
1.
|
To
approve the sale of the Purchased Interests, pursuant to the Agreement,
dated as of November 25, 2009, by and between Luntz Acquisition
(Delaware), LLC and the Company, a copy of which is attached as
Annex A
to the
accompanying proxy statement.
|
2.
|
To
consider and vote upon an adjournment of the Special Meeting, if necessary
for a period of not more than 30 days, to solicit additional proxies
if there are not sufficient votes at the time of the Special Meeting to
approve the Sale.
|
|
|
§
|
Over the
Internet.
Go to the website of the Company’s vote
tabulator, Colonial Stock Transfer, at
http://www.colonialstock.com/GEMSpecial20
10
and follow the instructions you will find there. You must specify how you
want your shares voted or your Internet vote cannot be completed and you
will receive an error message. Your shares will be voted according to your
instructions.
|
|
|
§
|
By
Telephone.
Call (877) 285-8605 toll-free from the U.S.
or Canada and follow the instructions. You must specify how you want your
shares voted and confirm your vote at the end of the call or your
telephone vote cannot be completed. Your shares will be voted according to
your instructions.
|
|
|
§
|
By
Mail.
Complete, sign and date the enclosed proxy card
and mail it in the enclosed postage-paid envelope to Colonial Stock
Transfer. Your proxy will be voted according to your
instructions.
|
|
|
§
|
In Person at the
Meeting.
If you attend the meeting, you may deliver your
completed proxy card in person or you may vote by completing a ballot,
which will be available at the
meeting.
|
|
|
§
|
Over the Internet or By
Telephone.
You will receive instructions from your bank,
broker or other nominee if you are permitted to vote over the Internet or
by telephone.
|
|
|
§
|
By Mail.
You
will receive instructions from your bank, broker or other nominee
explaining how to vote your shares.
|
|
|
§
|
In Person at the
Meeting.
Contact the bank, broker or other nominee that
holds your shares to obtain a proxy card and bring it with you to the
meeting.
A broker’s proxy
is
not
the form of proxy enclosed
with this proxy statement. You will not be able to vote shares you hold in
“street name” at the meeting unless you have a proxy from your broker
issued in your name giving you the right to vote the
shares.
|
|
|
§
|
the
value of the consideration to be received by the Company pursuant to the
SPA
|
§
|
the
inability of the Company to achieve profitability with the Company's debt
obligations.
|
§
|
the
inability of the Company to raise capital to sustain operations at its
current levels.
|
§
|
the
ability of the Company to reduce its indebtedness to CVC by more than $9
million
|
§
|
the
possibility of increasing shareholder value beginning with a profitable
SCWW as the foundation for growth and
development;
|
§
|
the
continued economic slowdown affecting the general state of the base
business with the need for greater volume in waste and revenue to
successfully implement the original strategic
plan;
|
§
|
the
potential for the Company’s employees to join a larger and better financed
organization;
|
§
|
the
financial and other terms and conditions of the SPA and the fact that they
were the product of negotiations between the parties:
and
|
§
|
the
terms of the SPA, including :
|
1.
|
the
cash purchase price of $14 million for the stock of GEM
DE;
|
2.
|
the
retention of $900,000 in cash from the trust account for the TSDF
facility;
|
3.
|
the
ongoing liabilities and obligations Buyer will assume and the impact that
will have on the Company’s future risk profile and underlying
costs;
|
4.
|
Buyer’s
intent to keep majority of personnel for continuity of business and work
security; and
|
5.
|
the
requirement that the sale be approved by the holders of a majority of the
Company’s common stock outstanding on the record
date.
|
§
|
the
risk that the sale might not be completed in a timely manner, or at
all;
|
§
|
the
exclusivity of negotiations and communication of the Company with only PSC
which will delay or prevent the Company from exploring an additional
interested buyer if PSC should decide to change or withdraw it’s offer to
purchase GEM DE;
|
§
|
the
conditions to the completion of the Sale must be satisfied or waived;
and
|
§
|
the
risk of diverting management focus and resources from other strategic
opportunities and from operational matters while working to implement the
sale.
|
§
|
SMH
Capital’s quarterly Environmental Services Industry Updates, an
Environmental Industry trade
publication;
|
§
|
daily
and weekly industry trade information from other Environmental Industry
trade publications;
|
§
|
industry
information published by publicly traded companies in the environmental
services business;
|
§
|
the
Wall Street Journal and
|
§
|
other
printed and broadcast media
|
Buyer:
|
Parent:
|
Luntz
Acquisition (Delaware), LLC.
|
PSC
Environmental Services, LLC ("PSC")
|
5151
San Felipe, Suite 1600
|
5151
San Felipe, Suite 1600
|
Houston,
TX 77056
|
Houston,
TX 77056
|
(713)
625-7019
|
(713)
625-7019
|
|
·
|
all
of GEW DE and its subsidiaries’ customer contracts and service
agreements;
|
|
|
|
·
|
all
information collected about GEW DE and its subsidiaries’
customers;
|
|
|
|
·
|
GEMWare
and all other intellectual property
rights;
|
|
|
|
·
|
all
software or other intellectual property rights that the GEM DE has
licensed from third parties;
|
|
|
|
·
|
substantially
all tangible personal property owned by GEM
DE;
|
|
|
|
·
|
all
rights in and under any contracts relating to GEM DE’s
business;
|
|
|
|
·
|
all
permits, authorizations, consents and approvals of any governmental entity
to the extent transferable by applicable
law;
|
|
|
|
·
|
all
books, records, files and papers, whether in hard copy or electronic
format, used in the business;
|
|
|
|
·
|
all
goodwill associated with the business or the purchased assets;
and
|
|
|
|
·
|
all
accounts receivable due from GEM DE as of the close of the
sale.
|
|
·
|
all long term lease obligations |
|
·
|
all documents relating to the organization, maintenance and existence of the Company and each of its subsidiaries; |
|
|
|
·
|
restricted cash which is posted as a bond with the State of California Department of Toxic Substance Control for the financial closure assurance of GEM DE’s subsidiary General Environmental Management of Rancho Cordova, LLC; |
|
|
|
·
|
all insurance policies and bonds and all prepaid expenses and deposits related thereto and all prepaid expenses relating to the Company; |
|
|
|
·
|
all issued and outstanding shares of GEMEM, CLW, and SCWW; |
|
|
|
·
|
all assets and operations of SCWW; |
|
|
|
·
|
all rights and obligations relating to the sale of MTS including the back up guarantee of $5.6 million due to CVC; and |
|
|
|
·
|
all public company related contracts. |
|
·
|
any obligation, duty or liability relating to the Company’s business as of the closing date; |
|
|
|
·
|
all employment obligations including all employee benefit plans and employee severance arrangements, and all director and officer indemnification obligations relating to the Company; |
|
|
|
·
|
the Company’s corporate offices in Pomona, CA; |
|
|
|
·
|
any obligation, duty or liability under the contracts and assets retained by the Company; |
|
|
|
·
|
the Company’s fees and expenses of creating the SPA and related ancillary agreements; and |
|
|
|
·
|
any liability or obligation for taxes for the period prior to the closing date. |
|
·
|
encourage, solicit, initiate, engage (including by way of furnishing or disclosing information) or participate in any negotiations with any entity (other than Buyer) concerning any merger, consolidation o other business combination involving GEM DE and its subsidiaries or acquisition of any portion of their respective assets or business, or encourage, solicit, initiate or entertain inquiries or proposals concerning, or which could reasonably be expected to lead to, any of the foregoing; |
|
|
|
·
|
negotiate or take any other action intended or designed to facilitate the efforts of any other entity relating to a possible transaction; or |
|
|
|
·
|
enter into any arrangements, agreements or understanding requiring any of them to abandon, terminate or fail to consummate the transactions contemplated by the Agreement. |
·
|
any
amendment to the organizational documents of GEM DE or any of the GEM DE
subsidiaries;
|
·
|
any
contingent liability incurred by the GEM DE or any of the GEM DE
subsidiaries, as guarantor or otherwise, with respect to the obligations
of others;
|
·
|
except
as listed, to the Knowledge of the Company and GEM DE, any encumbrance
placed on the GEM DE Shares or any of the properties of the GEM DE or any
of the GEM DE subsidiaries;
|
·
|
any
obligation or liability incurred by the GEM DE or any of the GEM DE
subsidiaries other than obligations and liabilities incurred in the
ordinary course of business (none of which is a claim, as defined by GAAP,
for breach of contract, breach of duty, breach of warranty, tort or
infringement of an Intellectual Property
Right);
|
·
|
any
sale or other disposition, or any agreement or other arrangement for the
sale or other disposition, of any of the properties or assets of the GEM
DE or any of the GEM DE Subsidiaries other than in the ordinary course of
business;
|
·
|
any
capital expenditure or commitment in excess of $5,000 with respect to any
individual item, or in excess of $25,000 with respect to all such
items;
|
·
|
any
lease or agreement to lease any assets with an annual rental in excess of
$5,000 with respect to any individual item or in excess of $25,000 with
respect to all such items;
|
·
|
any
damage, destruction or loss, whether or not covered by insurance, of any
of the assets or business of the GEM DE or any of the GEM DE
Subsidiaries;
|
·
|
any
(i) declaration, setting aside or payment of any dividend on, or (ii) the
making of any other distribution in respect of, or (iii) any direct or
indirect redemption, purchase or other acquisition by the GEM DE of, the
capital stock of the GEM DE or GEM DE subsidiaries Equity, or by GEM DE
subsidiaries of the GEM DE subsidiaries
Equity;
|
·
|
any
issuance of any securities of the GEM DE or any of the GEM DE
subsidiaries;
|
·
|
any
labor trouble or claim of unfair labor practices involving the GEM DE or
any of the GEM DE subsidiaries;
|
·
|
any
obligation or liability incurred by the GEM DE or any of the GEM DE
subsidiaries to, or any loans or advances made by the GEM DE or any of the
GEM DE subsidiaries to, any of its officers, directors, members,
affiliates, employees or stockholders, except normal compensation and
expense allowances payable to
officers;
|
·
|
any
change in (i) the compensation or other amounts payable or to become
payable by the GEM DE or any of the GEM DE subsidiaries to any of its
officers, employees or agents; (ii) any bonus arrangements with any of
such officers, employees or agents; (iii) any severance or termination
arrangements; (iv) the terms of any employment agreement; or (v) the
benefits payable under any benefit
plan;
|
·
|
any
change with respect to the management or supervisory personnel of the GEM
DE or any of the GEM DE
subsidiaries;
|
·
|
any
payment or discharge of a material Encumbrance or liability of the GEM DE
or any of the GEM DE subsidiaries which was not shown on the Base Balance
Sheet or incurred in the ordinary course of business
thereafter;
|
·
|
any
write-downs or write-offs as uncollectible of any notes or accounts
receivable in excess of allowance for doubtful accounts, except for
write-downs or write-offs that are in the aggregate less than $10,000
incurred in the ordinary course of
business;
|
·
|
any
disposal, sale, assignment, license or lapse of any rights to the use of
any intellectual property right, or disclosure to any person other than
Buyer of any business information or other information not theretofore a
matter of public knowledge other than pursuant to confidentiality
agreements;
|
·
|
any
change in any method of accounting or accounting practice, whether or not
such change was permitted by GAAP;
or
|
·
|
any
agreement, whether in writing or otherwise, to take any action described
above in this section.
|
·
|
the
Company’s representations and warranties in the Agreement are true and
correct in all material respects as of the closing date of the
Sale;
|
·
|
the
Sale is approved by the Company’s
stockholders;
|
·
|
no
suit, action, claim, proceeding or formal investigation is brought by a
governmental entity seeking to prevent the completion of the asset sale
and no injunction or other order or statute, rule, regulation or executive
order by any government entity prevents the completion of the asset
sale;
|
·
|
neither,
the Company, GEM NewCo, GEM LP or any of the Company subsidiaries shall
(i) have commenced a voluntary Proceeding seeking liquidation,
reorganization or other relief with respect to itself or its debts under
any bankruptcy, insolvency or other similar law now or hereafter in effect
or seeking the appointment of a trustee, receiver, liquidator, custodian
or other similar official of it or substantially all of its property, or
(ii) have an involuntary Proceeding commenced against it seeking
liquidation, reorganization or other relief with respect to it or its
debts under any bankruptcy, insolvency or other similar law now or
hereinafter in effect or seeking the appointing of a trustee, receiver,
liquidator, custodian or similar official of it or substantially all of
its property, or (iii) have consented to any such relief or to the
appointment of or taking possession by any such official against it, or
(iv) have made a general assignment for the benefit of its creditors, or
(v) have an attachment placed on any of its properties or
assets;
|
·
|
At
or prior to the Closing, the following actions shall have been completed
and/or documents shall have been delivered, in each case in form and
substance satisfactory to Buyer in its sole and absolute
discretion:
|
·
|
All claims,
demands, liabilities, and obligations of Company or the Company
subsidiaries (or of GEM NewCo or GEM LP) pursuant to, under, or in respect
of the Amended and Restated Revolving Credit and Term Loan Agreement
dated as of September 4, 2009 by and between the Company's Senior Secured
Lender, CVC California, LLC (“CVC”) and the Company (as it may be amended
from time to time) and the Collateral Agreement dated as of August 31,
2008 by and among CVC, the Company and its subsidiaries (as it
may be amended from time to time), including but not limited to Company
and Company Subsidiaries (and GEM NewCo and GEM LP), together with the
Convertible Term Note, the Revolving Credit Note, and the
Warrant referenced therein, and any guaranties or pledges in respect
thereof, shall have been fully terminated, discharged, released,
and satisfied, and the Company Shares, Purchased Interests and all assets
of the Company and the Company subsidiaries (and GEM NewCo and GEM LP)
shall be free and clear of encumbrances held by
CVC;
|
·
|
CVC
shall have executed and delivered to the Company and Buyer a Paydown and
Release Letter, and shall have caused the other parties thereto to have
executed and delivered the Paydown and Release Letter. The
Paydown and Release Letter shall have remained in full force and effect
through the Closing;
|
·
|
CVC
shall have executed and delivered to and the Buyer a support and voting
agreement (the “CVC Voting Agreement”), and shall have caused the parties
thereto to have executed and delivered the CVC Voting
Agreement. The CVC Voting Agreement shall have remained in full
force and effect through the
Closing;
|
·
|
Any
and all promissory notes in favor of Randy Costales, Gloria Costales, NCF
Corporation, as Trustee, and/or NCF Charitable Trust (collectively, the
“Island Sellers”) shall have been assigned to and assumed by
Seller, and each of the Island Sellers shall have executed releases in
connection therewith in favor of the Company and the Company
Subsidiaries;
|
·
|
Any
and all obligations of the Company or the Company subsidiaries to Randy
Costales pursuant to that certain Employment Agreement between Island
Environmental Services, Inc. and Randy Costales dated August 31, 2008
shall have been assigned to and assumed by the Company and Mr. Costales
shall have executed a release in connection therewith in favor of the GEM
DE and the GEM DE subsidiaries;
|
·
|
In
connection with Company’s consummation of the purchase of California
Living Waters, Inc. the Company shall have permitted Buyer to conduct
diligence and inspection of California Living Waters, Incorporated, its
subsidiary and their respective business, assets and liabilities to the
same extent as
provided
for in the SPA with respect to GEM DE and the GEM DE's subsidiaries, and
Buyer shall have become satisfied that no liabilities or obligations of
California Living Waters, Incorporated and its subsidiaries adversely
affect GEM DE and its
subsidiaries;
|
·
|
Any
obligations of GEM DE or its subsidiaries pursuant to the MTS
Agreement shall have been released, and GEM DE shares, Purchased Interests
and all assets of GEM DE and its subsidiaries shall be free and clear of
encumbrances
|
·
|
Each
of the leases regarding the Real Property located at 2490 Pomona Blvd,
Pomona, CA; 7821 S. 198
th
Street, Kent, WA; and 11--- White Rock Road, Rancho Cordova, CA shall have
been validly assigned to GEM DE, and any associated landlord or other
consents necessary or, in the Buyer’s discretion, desirable to effect such
assignment shall have been
obtained;
|
·
|
The
lease regarding the leased real property at Temple Avenue, Pomona, shall
have been assigned to and assumed by the Company and a release in
connection therewith shall have been executed in favor of GEM DE and its
subsidiaries;
|
·
|
The
Company shall have caused the Company and the Company’s subsidiaries to
deliver an executed Board resolution terminating the 401(k) plan effective
no later than the day prior to closing, and the 401(k) plan shall have
been terminated;
|
·
|
Any
long-term debt of GEM DE, and its subsidiaries, GEM NewCo and GEM LP,
other than those capitalized leases set forth on a schedule in the SPA,
shall have been assigned to and assumed by the Company and a release in
connection therewith in favor of GEM DE and its subsidiaries shall have
been executed and delivered to GEM
DE;
|
·
|
Buyer’s
lenders and agent under its credit facility shall have consented in
writing to the consummation of the transactions contemplated hereby and
shall have waived any defaults or events of default in connection
therewith;
|
·
|
As
of the date hereof, management shall have executed and delivered to Buyer
of a support and voting agreement (the “Management Voting Agreement”), and
shall have caused the other parties party thereto to have executed and
delivered the Management Voting Agreement. The Management
Voting Agreement shall have remained in full force and effect through the
Closing; and
|
·
|
The
Company and GEM DE shall have formed a Delaware corporation that shall be
wholly-owned by GEM DE and named GEM NewCo, Inc. (“GEM NewCo”), b) formed
a Delaware limited partnership, the sole limited partner of which shall be
GEM DE, and the sole general partner of which shall be GEM NewCo, which
limited partnership shall be named GEM Pomona LP (“GEM LP”), c) effect a
merger between GEM LP and GEM DE, whereby GEM LP will be the surviving
entity, d) sell to Buyer the limited partner interests of GEM LP and all
of the outstanding shares of stock of GEM NewCo (the “Purchased
Interests”).
|
·
|
Each
of GEM NewCo and GEM LP shall have executed and delivered to Buyer a
Joinder Agreement.
|
·
|
Buyer’s
representations and warranties in the Agreement are true and correct in
all material respects as of the closing date of the
Sale;
|
·
|
no
suit, action, claim, proceeding or formal investigation is brought by a
governmental entity seeking to prevent the completion of the Sale and no
injunction or other order or statute, rule, regulation or executive order
by any government entity prevents the completion of the
Sale;
|
·
|
the
Company will not within the United States of America, either directly or
indirectly, as principal, agent, owner, seller, partner, investor,
shareholder (other than solely as a holder of not more than 1% of the
issued and outstanding shares of any public corporation), consultant,
advisor or otherwise howsoever own, operate, carry on or engage in the
operation of or have any financial interest in or provide, directly or
indirectly, financial assistance to or lend money to or guarantee the
debts or obligations of any Person carrying on or engaged in any business
that is competitive with or identical to the business conducted by Buyer
or any of its affiliates which are in the similar business with
Buyer. Notwithstanding the foregoing, Seller shall not be, by
virtue of this Agreement, constrained from engaging in the wastewater
treatment and related services
business.
|
·
|
the
Company shall not directly, or indirectly, for itself or for any other
Person: a) solicit, interfere with or endeavor to entice away from Buyer
or any of its affiliates, any employee, customer or client; b) attempt to
direct or solicit any employee, customer or client away from Buyer or any
of its affiliates; or advise any Person not to do business with Buyer or
any of its affiliates
.
|
·
|
Payroll
services;
|
·
|
Employee
benefits services;
|
·
|
Issue
W-2’s for 2009;
|
·
|
Assistance
from Company employees for the purposes of executing checks on behalf of
GEM NewCo and GEM LP;
|
·
|
Services
of a network engineer to ensure network connectivity, system access, email
access and printing capabilities remain operational; to assist in
migration activities required to transfer users to the Buyer network; and
to respond to help desk requests;
|
·
|
Assistance
from knowledgeable employees of the Company regarding accounting and
billing activities of GEM DE and its
subsidiaries;
|
·
|
Normal
accounting for all time periods prior to Closing, and provision of any
associated information, including but not limited to data
conversion;
|
·
|
there
is an event which results in a major casualty loss in excess of
$250,000;
|
·
|
the
conditions to Close have not been satisfied at or prior to the
Closing;
|
·
|
the
Closing shall not have occurred and the transactions contemplated by the
Agreement consummated by March 12, 2010;
and
|
·
|
the
Company or GEM DE breaches the exclusive dealings agreement between the
Company and Buyer.
|
·
|
The
Company may terminate the Agreement
if:
|
·
|
Buyer
breaches certain of the covenants or warranties set forth in the
Agreement;
|
·
|
there
is an injunction, restraining order or other court order issued by any
court of competent jurisdiction which directs that the Agreement or any
material transaction contemplated thereby shall not be
consummated; or
|
·
|
the
Closing shall not have occurred within thirty (30) days from obtaining the
stockholder approval for the transaction contemplated in the
Agreement.
|
·
|
any
breaching party shall remain liable to a non-breaching party for its
damages;
|
·
|
Buyer
shall be entitled to be paid, and the Company shall pay to Buyer
immediately upon such termination, a termination fee of $500,000 if the
Company and GEM DE breach the exclusive dealings provision of the SPA;
and
|
·
|
notwithstanding
any termination of the SPA, the following articles shall survive the
termination of the Agreement:
|
·
|
Covenants
of the Company;
|
·
|
Covenants
of the Buyer;
|
·
|
Conditions
to Closing of Buyer
|
·
|
Conditions
to Closing of Company
|
·
|
Indemnification
of Buyer;
|
·
|
Indemnification
of Company;
|
·
|
Termination
of the Agreement; and
|
·
|
Other
miscellaneous items;
|
·
|
for
the purchase of any commodity, material, equipment or asset, except
contracts or agreements (except for purchase orders in the ordinary course
of business involving payments of less than $5,000
each);
|
·
|
for
the sale or lease of its products or services not made in the ordinary
course of business;
|
·
|
which
is otherwise material to the assets or business of GEM DE or any of its
subsidiaries.
|
·
|
each
benefit plan complies and has complied in the past, as to form and in
operation, with the provisions of all applicable
Laws;
|
·
|
all
required filings, reports, and notices to governmental authorities or to
employees have been properly and timely made, and all such filings and
employee disclosures required to be made within 30 days after closing that
are based in whole or in part upon the period prior to the closing shall
have been prepared and delivered to Buyer on or before the
closing;
|
·
|
no
such Benefit Plan is currently under audit or investigation by any
Governmental Authority and no correction procedures have been initiated or
completed with the IRS for any ERISA Benefit plan meant to be qualified
under Section 401 of the Code or with the Department of Labor for any
ERISA Benefit plan;
|
·
|
there
are no actions, suits or claims (other than routine claims for benefits)
pending or threatened against any of the Benefit plans or against the
assets of any Benefit plan;
|
·
|
all
premiums or amounts due in connection with any Benefit plan, including
without limitation premiums due the PBGC and premiums for life and health
insurance and annuity contracts, stop-loss insurance policies, and any
third party administrative expenses, and there are no such premiums or
amounts due that are attributable to any period of time before the Closing
that will not have been paid or accrued for on or before the
Closing;
|
·
|
that
has been commenced by or against GEM DE or any of its subsidiaries or that
otherwise relates to or may affect the business of, or any of the assets
owned or used by, GEM DE or any of its subsidiaries;
or
|
·
|
that
challenges, or that may have the effect of preventing, delaying, making
illegal, or otherwise interfering with, any of the transactions
contemplated hereby and by the Agreement or any ancillary
agreements.
|
·
|
any
breach of any of the representations or warranties made by the Company or
GEM DE in or pursuant to the Agreement or any schedule thereto, or any
other agreement, document, instrument or certificate delivered by the
Company or GEM DE pursuant to or in connection with the
Agreement
,
including without limitation any ancillary
agreement;
|
·
|
any
breach of any covenant made or obligation incurred by the Company or GEM
DE in or pursuant to the Agreement or any ancillary
agreement;
|
·
|
any
liability, payment or obligation for or in respect of taxes owing by the
Company ,or any tax affiliate, DE or its subsidiaries or Buyer, as
successor to GEM DE's and GEM DE's subsidiaries’ businesses for all
periods, or portions thereof, up to and including the closing
date;
|
·
|
any
penalties for fines owning or accessed for violations resulting from
inspections of the operations of GEM DE or its subsidiaries by the
Department of Toxic Substances
Control;
|
·
|
any
liability, payment or obligation related to the claims alleged in the (a)
the lawsuit brought by Romic against the Company, et al. (Case No.
BC373769 in the Superior Court of the State of California, County of Los
Angeles), (b) the lawsuit brought by Clean Harbors against the Company, et
al. (Case No. 2009-CV-00355 in the Superior Court of the State of
California, County of Norfolk), or (c) the lawsuit brought by Francis
Passarelli against GEM DE, et al (Case No. 07-CC-04029 in the Superior
Court of California, County of
Orange).;
|
·
|
any
liability, payment or obligation for or in respect of any condition to the
Closing contained in Article 7 to the Agreement to the extent any such
conditions had not been satisfied as provided therein at or prior to the
closing;
|
·
|
any
breach of any of the representations or warranties made by Buyer in or
pursuant to the Agreement or in another agreement, document, instrument or
certificate delivered to the Company pursuant hereto or in connection with
the Closing; or
|
·
|
any
breach of any covenant made or obligation incurred by Buyer in or pursuant
to the Agreement.
|
Buyer:
|
Parent:
|
Luntz
Acquisition (Delaware), LLC.
|
PSC
Environmental Services, LLC.
|
5151
San Felipe, Suite 1600
|
5151
San Felipe, Suite 1600
|
Houston,
TX 77056
|
Houston,
TX 77056
|
(713)
625-7019
|
(713)
625-7019
|
§
|
Hazpak
Environmental Services, Inc. (HES),
|
§
|
the
assets of EnVectra, Inc. (EnV),
|
§
|
the
assets of Firestone Environmental Services Company (dba Prime
Environmental Services Company), and Firestone Associates, Inc. (dba
Firestone Energy Company), and
|
§
|
100%
of the membership interest in Pollution Control Industries of California,
LLC.
|
•
|
Highly
Odorous
|
•
|
High
Oil/Solvent Content
|
•
|
High
Viscosity
|
•
|
Sanitary
Sources
|
•
|
Biomedical
Sources
|
•
|
Plating
Etching Sources
|
•
|
Surface
preparation Sources
|
•
|
Alkaline
or acid cleaning Sources
|
•
|
Metal
Finishing Sources
|
•
|
Anodizing
operations
|
•
|
Hazardous
Wastewater
|
•
|
Domestic
Wastewater
: Local septic cleaning and chemical toilet operators
have the choice of using the SCWW Facility or transporting their
wastewaters to the nearest competing facility located 90-plus miles away
at the Los .Angeles County's facility. The Company estimates that it has
70-75% of the Ventura County septic and chemical toilet markets.
Regionally, municipalities from as far as San Luis Obispo and as close as
Santa Paula have been utilizing SCWW to treat their secondary digester
sludge.
|
•
|
Industrial
Wastewater:
There are a number of competitors in the broad spectrum
of industrial waste treatment business. However, these competing
facilities are located in the Los Angeles Metropolitan area. The
industrial business is very specialized and, within it, SCWW competes by
accepting only non-hazardous wastewater, by providing quick off-loading,
and providing its convenient and accessible location to
industrial waste generators along the Central Coast of
California.
|
•
|
Oil & Gas
Wastewater:
SCWW was initially developed to be a major service
provider to this segment and continues to service the high oil content,
low viscosity wastes from Los Angeles County north to Kern County. SCWW
provides quicker acceptance and offloading of oil and gas wastewater then
it’s single local competitor.
|
•
|
Private
water treatment facilities that discharge to a public municipal water
treatment plant are subject to Federal Regulation §437, which (i) sets
national discharge limits for each chemical contained in the discharge and
(ii) compliance standards for sampling and maintaining
records.
|
•
|
Under
Title 14 and Title 17 of the California Code focuses solely on the solids
recovered through the treatment process, how they may be disposed and on
what basis they may and may not be recycled, with the recycling rules
varying sharply depending
on:
|
o
|
If
the waste is being recycled for resale, there is no regulation;
or
|
o
|
If
the waste is being given away as compost, there is
regulation.
|
•
|
The
State Water Resources Board monitors the adequacy of rainwater
drainage.
|
•
|
The
County Environmental Health Board is the agency charged with supervising
all state regulations governing solid wastes and their
disposal.
|
•
|
The
County Planning Division monitors site land use and issues Conditional Use
Permits.
|
•
|
The
County Air Pollution District monitors nuisance orders under Rule
95.
|
PAGE
|
65
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
PAGE
|
66
|
BALANCE
SHEETS AS OF OCTOBER 31, 2009 (UNAUDITED) AND DECEMBER 31,
2008
|
PAGE
|
67
|
STATEMENTS
OF OPERATIONS FOR THE TEN MONTHS ENDED OCTOBER 31, 2009 AND 2008
(UNAUDITED) AND THE YEAR ENDED DECEMBER 31,
2008
|
PAGE
|
68
|
STATEMENT
OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE TEN MONTHS ENDED OCTOBER 31,
2009 (UNAUDITED) AND FOR THE YEAR ENDED DECEMBER 31,
2008
|
PAGE
|
69
|
STATEMENTS
OF CASH FLOWS FOR THE TEN MONTHS ENDED OCTOBER 31, 2009 AND 2008
(UNAUDITED) AND FOR THE YEAR ENDED DECEMBER 31, 2008
|
PAGES
|
70
|
NOTES
TO FINANCIAL STATEMENTS FOR THE TEN MONTHS ENDED OCTOBER 31, 2009 AND 2008
(UNAUDITED) AND FOR THE YEAR ENDED DECEMBER 31,
2008
|
October
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
CURRENT
ASSETS
|
||||||||
Cash
and cash equivalents
|
$ | 492,193 | $ | 466,028 | ||||
Accounts
receivable, net of allowance for doubtful accounts of $10,000
and
$ 10,000
|
1,331,224 | 1,254,936 | ||||||
Prepaid
expenses and other current assets
|
85,361 | 108,162 | ||||||
Total
Current Assets
|
1,908,778 | 1,829,126 | ||||||
PROPERTY
AND EQUIPMENT – net of accumulated depreciation of
$1,767,135 and $ 1,339,212
|
10,777,655 | 12,459,449 | ||||||
Other
assets :
|
||||||||
Permits
and franchises, net of accumulated amortization of $781,801 and
$647,193
|
1,486,503 | 1,621,111 | ||||||
Deferred
loan fees, net of accumulated amortization of $109,284 and
$80,766
|
162,854 | 191,372 | ||||||
Other
noncurrent assets
|
179,707 | 149,428 | ||||||
TOTAL
ASSETS
|
$ | 14,515,497 | $ | 16,250,486 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Accounts
payable
|
$ | 635,665 | $ | 771,977 | ||||
Accrued
expenses
|
128,232 | 217,093 | ||||||
Current
portion of long – term debt
|
716,488 | 587,873 | ||||||
Total
Current Liabilities
|
1,480,385 | 1,576,943 | ||||||
LONG-TERM
LIABILITIES
|
||||||||
Non-current
portion of long-term debt
|
3,736,203 | 5,188,987 | ||||||
Subordinated
related party notes payable
|
1,800,000 | 1,800,000 | ||||||
Deferred
income taxes
|
2,659,933 | 2,672,336 | ||||||
Total
Liabilities
|
9,676,521 | 11,238,266 | ||||||
COMMITMENTS
& CONTINGENCIES
|
||||||||
STOCKHOLDERS’
EQUITY
|
||||||||
Common
stock, no par value, 1,000 shares authorized, 600 shares issued and
outstanding
|
- | - | ||||||
Paid-in
capital
|
4,946,236 | 5,100,877 | ||||||
Accumulated
deficit
|
(107,260 | ) | ( 88,657 | ) | ||||
Total
Stockholders' Equity
|
4,838,976 | 5,012,220 | ||||||
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 14,515,497 | $ | 16,250,486 |
Ten Months
Ended
|
Year
ended
|
|||||||||||
October
31,
|
October
31,
|
December
31,
|
||||||||||
2009
|
2008
|
2008
|
||||||||||
(Unaudited)
|
(Unaudited)
|
|||||||||||
REVENUES
|
$
|
5,291,866
|
$
|
6,217,063
|
$
|
7,615,880
|
||||||
COST
OF REVENUES
|
3,650,471
|
3,729,312
|
4,593,040
|
|||||||||
GROSS
PROFIT
|
1,641,395
|
2,487,751
|
3,022,840
|
|||||||||
OPERATING
EXPENSES
|
988,259
|
1,602,758
|
1,992,184
|
|||||||||
LOSS
ON SALE OF PROPERTY
|
305,129
|
-
|
-
|
|||||||||
OPERATING
INCOME
|
348,007
|
884,993
|
1,030,656
|
|||||||||
OTHER
INCOME (EXPENSE):
|
||||||||||||
Interest
income
|
413
|
5,341
|
-
|
|||||||||
Interest
expense
|
(379,486
|
)
|
(431,199
|
)
|
(521,882
|
)
|
||||||
Other
non-operating income
|
60
|
-
|
5,256
|
|||||||||
Total
other expenses
|
(379,013
|
)
|
(425,858
|
)
|
(516,626
|
) | ||||||
|
||||||||||||
INCOME
(LOSS) BEFORE INCOME TAXES
|
(31,00
6
|
)
|
459,135
|
514,030
|
||||||||
Provisions
for income taxes
|
12,403
|
(183,654
|
)
|
(205,612
|
)
|
|||||||
NET
INCOME (LOSS)
|
$
|
(18,60
3
|
)
|
$
|
275,481
|
$
|
308,418
|
Additional
|
||||||||||||||||||||
Common
Stock
|
Paid-in
|
Accumulated
|
||||||||||||||||||
Shares
|
Amount
|
Capital
|
Deficit
|
Total
|
||||||||||||||||
Balance,
January 1, 2008
|
600 | $ | - | $ | 5,100,877 | $ | (397,075 | ) | $ | 4,703,802 | ||||||||||
Net
income for the year ended December 31, 2008
|
- | 308,418 | 308,418 | |||||||||||||||||
Balance,
December 31, 2008
|
600 | - | 5,100,877 | (88,657 | ) | 5,012,220 | ||||||||||||||
Net
loss for the ten months ended October 31, 2009
|
(18,603 | ) | (18,603 | ) | ||||||||||||||||
Distribution
to shareholder
|
(154,641 | ) | (154,641 | ) | ||||||||||||||||
Balance,
October 31, 2009 (Unaudited)
|
600 | $ | - | $ | 4,946,236 | $ | (107,260 | ) | $ | 4,838,976 |
Ten
Months Ended
|
Year
Ended
|
|||||||||||
October
31,
|
October
31,
|
December
31,
|
||||||||||
2009
|
2008
|
2008
|
||||||||||
(Unaudited) | (Unaudited) | |||||||||||
CASH
FLOWS FROM OPERATING ACTIVITIES :
|
||||||||||||
Net
income (loss)
|
$ | (18,603 | ) | $ | 275,481 | $ | 308,418 | |||||
Adjustments
to reconcile net income (loss) to net cash provided by
operating activities:
|
||||||||||||
Loss
on disposal of Property
|
305,129 | - | - | |||||||||
Depreciation
and Amortization
|
562,531 | 662,884 | 760,057 | |||||||||
Amortization
of deferred financing fees
|
28,518 | 19,835 | 17,434 | |||||||||
Amortization
of note discount
|
20,893 | - | 38,513 | |||||||||
Deferred
income taxes
|
(12,403 | ) | 191,210 | 213,168 | ||||||||
Changes
in operating assets and liabilities:
|
||||||||||||
(Increase)
decrease in:
|
||||||||||||
Accounts
receivable
|
(76,288 | ) | (729,798 | ) | (646,936 | ) | ||||||
Prepaid
and other current assets
|
(7,478 | ) | (162,882 | ) | (40,666 | ) | ||||||
Increase
(decrease) in:
|
||||||||||||
Accounts
payable
|
(136,312 | ) | 498,803 | 730,585 | ||||||||
Accrued
expenses and other liabilities
|
(88,861 | ) | 332,903 | 31,190 | ||||||||
Net
cash provided by Operating Activities
|
577,126 | 1,088,436 | 1,411,763 | |||||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
Purchase
of property and equipment
|
(251,773 | ) | (1,073,345 | ) | (1,305,827 | ) | ||||||
Net
Cash Used In Investing Activities
|
(251,773 | ) | (1,073,345 | ) | (1,305,827 | ) | ||||||
CASHF
LOWS FROM FINANCING ACTIVITIES:
|
||||||||||||
Proceeds
from borrowings on long – term debt
|
400,267 | - | 230,00 | |||||||||
Payments
of notes payable
|
(544,814 | ) | (260,990 | ) | (359,311 | ) | ||||||
Distribution
to shareholders
|
(154,641 | ) | - | - | ||||||||
Net
Cash Used In Financing Activities
|
(299,188 | ) | (260,990 | ) | (129,311 | ) | ||||||
NET
INCREASE (DECREASE) IN CASH
|
26,165 | (245,899 | ) | (23,375 | ) | |||||||
CASH
– BEGINNING OF YEAR
|
466,028 | 489,403 | 489,403 | |||||||||
CASH
– END OF PERIOD
|
$ | 492,193 | $ | 243,504 | $ | 466,028 | ||||||
SUPPLEMENTAL
DISCLOSURE OF CASHFLOW INFORMATION:
|
||||||||||||
Cash
paid for:
|
||||||||||||
Interest
expense
|
$ | 399,269 | $ | 431,199 | $ | 521,882 | ||||||
Income
Taxes
|
$ | - | $ | - | $ | - | ||||||
NONCASH
INVESTING AND FINANCING ACTIVITIES:
|
||||||||||||
Assumption
of Notes Payable upon purchase of Property
|
$ | - | $ | - | $ | 1,200,515 | ||||||
Assumption
of Notes Payable by
purchaser upon
sale of Property
|
$ | 1,200,515 | $ | - | $ | - |
Vehicles
|
5 - 6 Years
|
|
Machinery
and Equipment
|
7
- 22 Years
|
|
Furniture
and fixtures
|
10 Years
|
|
Plant
and Pipeline
|
20
- 22 years
|
|
Land
improvements
|
20 years
|
October
31,
2009
|
December
31,
2008
|
|||||||
Plant
and Equipment
|
$ | 6,953,406 | $ | 6,953,406 | ||||
Land
|
3,225,000 | 4,730,644 | ||||||
Machinery
& Equipment
|
1,927,121 | 1,675,348 | ||||||
Land
Improvements
|
241,569 | 241,569 | ||||||
Vehicles
|
122,090 | 122,090 | ||||||
Construction
in progress
|
62,543 | 62,543 | ||||||
Furniture
and Fixtures
|
13,061 | 13,061 | ||||||
12,544,790 | 13,798,661 | |||||||
Less
accumulated depreciation
|
(1,767,135 | ) | (1,339,212 | ) | ||||
Property
and equipment net of accumulated depreciation
|
$ | 10,777,655 | $ | 12,459,449 |
October
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
(unaudited)
|
||||||||
(a)
Notes Payable, National Bank of California
|
$ | 4,120,707 | $ | 3,911,425 | ||||
(b)
Note payable, Wiker Trust
|
280,000 | 330,000 | ||||||
(c)
Note payable, Saticoy
|
- | 549,493 | ||||||
(d)
Note payable, Avalon Real Estate
|
- | 651,022 | ||||||
(e)
Note payable, Agua de Oro 2
|
57,146 | 103,030 | ||||||
(f)
Note payable, So. Calif. Management Services, Inc. (“SCM”)
|
- | 230,000 | ||||||
(g)
Note payable, OMNI Bank
|
25,854 | 48,799 | ||||||
(h) Note
payable, Carol Cole
|
28,900 | 33,900 | ||||||
Total
notes payable
|
4,512,607 | 5,857,669 | ||||||
Less
Note discount
|
59,916 | 80,809 | ||||||
Less
current portion
|
716,488 | 587,873 | ||||||
Notes
payable, net of current portion
|
$ | 3,736,203 | 5,188,987 |
(i)
Note payable, National Bank of California 1
|
$ | 1,788,776 | $ | 1,846,295 | ||||
(ii)
Note payable, National Bank of California 2
|
1,710,400 | 1,759,666 | ||||||
(iii)
Note payable, National Bank of California 3
|
66,883 | 110,970 | ||||||
(iv)
Note payable, National Bank of California 4
|
154,381 | 194,494 | ||||||
(v)
Note payable , National Bank of California 5
|
400,267 | - | ||||||
Total
|
$ | 4,120,707 | $ | 3,911,425 |
Year
Ended December 31,
|
||||
Remainder of
2009
|
||||
2009
|
$ | 587,873 | ||
2010
|
1,651,348 | |||
2011
|
1,375,868 | |||
2012
|
1,157,970 | |||
2013
|
315,467 | |||
Thereafter
|
2,569,143 | |||
$ | 7,657,669 |
(a)
Note payable, Wiker Trust
|
$ | 800,000 | $ | 800,000 | ||||
(b)
Note payable, US Environmental Response
|
1,000,000 | 1,000,000 | ||||||
Total
|
$ | 1,800,000 | $ | 1,800,000 |
Years
ending December 31,
|
||||
Remainder
of 2009
|
$ | 160,904 | ||
2010
|
160,904 | |||
2011
|
160,904 | |||
2012
|
160,904 | |||
2013
|
160,904 | |||
Thereafter
|
816,591 | |||
$ | 1,621,111 |
§
|
Transportation, Logistics
Management, and Collection
– specialized handling, packaging,
transportation and disposal of industrial waste, laboratory quantities of
hazardous chemicals, household hazardous wastes, and
pesticides;
|
§
|
Incineration
– the
preferred method for treatment of organic hazardous waste because it
effectively destroys the
contaminants;
|
§
|
Landfill Disposal
– used
primarily for the disposal of inorganic wastes;
|
§
|
Physical Waste Treatment
– used to reduce the volume or toxicity of waste to make it suitable for
further treatment, reuse, or
disposal;
|
§
|
Reuse/Recycle and Fuels
Blending
– removes impurities to restore suitability for an
intended purpose and to reduce the volume of waste;
|
§
|
Wastewater Treatment
–
separates wastes including industrial liquid wastes containing heavy
metals, organics and suspended solids through physical and chemical
treatment so that the treated water can be discharged to local sewer
systems under permits;
|
§
|
Remediation and Site
Services
– includes the maintenance of industrial facilities and
equipment such as recurring cleaning in order to continue operations,
maintain and improve operating efficiencies, and satisfy safety
requirements; the planned cleanup of hazardous wastes sites and the
cleanup of accidental spills and discharges, such as those resulting from
transportation accidents; and the cleanup and restoration of buildings,
equipment, and other sites and facilities that have been
contaminated.
|
§
|
On-Site
Services – the provision of professional and fully trained staff to manage
clients’ environmental needs on location.
|
§
|
Lab
Packing – the proper combination and packaging of hazardous waste in
approved containers to eliminate the potential for reactions among
chemical components.
|
§
|
Bulk
Waste – the managing and transportation of waste in bulk quantities,
either as liquids in vacuum tankers or as solids in dumpster type roll off
containers.
|
§
|
LTL
Program - the managing and transportation of containerized waste in
Department of Transportation/United Nations approved drums and
containers.
|
§
|
Transportation
– the transportation of clients’ waste streams in fully permitted and
environmentally outfitted vehicles
|
§
|
Emergency
Response – the immediate response to hazardous materials or waste
incidents for government and industry, including providing quick and
appropriate response for potential homeland security
incidents.
|
§
|
Remediation
– project work to clean up contaminated sites facing environmental
issues.
|
§
|
Provide
application software to profile, track any waste streams, and routinely
process all compliance reporting requirements with various regulatory
agencies.
|
§
|
All
services may be provided electronically through our software
offering.
|
§
|
Assist
clients with Environmental Health and Safety (“
EHS
”)
compliance.
|
§
|
Provide
necessary and mandated training on environmental
issues.
|
§
|
Provide
report generation for documentation to agencies overseeing environmental
issues.
|
§
|
Provide
digital and hard copy waste tracking of all waste
activity.
|
§
|
Provide
permit writing and management for the acquisition and tracking of
necessary permits for clients.
|
§
|
Write
manuals and plans required by all companies with hazardous materials and
waste.
|
§
|
Provide
legislative and regulatory analysis pertaining to current and proposed
legislation as it pertains to the hazardous waste industry and how that
affects our clients.
|
§
|
Provide
electronic record keeping of all EHS documents and
information.
|
§
|
Provide
outsource staffing for all EHS requirements eliminating the need for
clients to hire in house personnel.
|
§
|
Provide
alternative solutions to clients where certain chemicals or waste streams
can be recycled or reused in another capacity thereby eliminating the
disposal expense and exposure for our clients.
|
§
|
Develop
a program where clients look to us as the leader in providing fully
integrated solutions to limit their liability on waste streams and
chemicals.
|
§
|
Provide
on-site services for government installations meeting all the requirements
to manage, transport, and track waste streams from government
contracts.
|
§
|
The
Rancho Cordova Facility enables us to offer more efficient and
cost-effective recycling/disposal options while enhancing our corporate
profitability.
|
§
|
Ground
Water treatment on-site – treatment of ground water contaminated with
toxic chemicals, particularly perchlorate.
|
§
|
On-site
treatment option for clients – treatment of waste at large volume waste
clients.
|
§
|
Permanent
non-hazardous wastewater treatment facility provides cost savings for
clients and enhanced margin for us in the managing and treatment of waste
streams.
|
§
|
managing
waste streams and chemicals;
|
§
|
supervising
and managing the handling, paperwork, tracking, and transportation of
waste streams and chemicals on a client’s
location;
|
§
|
labeling,
collecting, and transporting containerized wastes;
|
§
|
bulk
waste pick ups and transportation;
|
§
|
emergency
response to spill incidents;
|
§
|
industrial
cleaning of equipment or processes, tank
cleaning;
|
§
|
parts
washer fluid removal and replenishment;
|
§
|
chemical
process dismantling;
|
§
|
mobile
waste water treatment; and
|
§
|
enterprise
software for worldwide integration of environmental management and
tracking requirements;
|
§
|
regulatory/legislative
analysis;
|
§
|
development
and maintenance of an EHS procedure manual;
|
§
|
participation
in regulatory rulemaking process;
|
§
|
maintaining
a waste and permit database;
|
§
|
report
preparation and submittal of
permits;
|
§
|
developing
required environmental plans and updates;
|
§
|
regulatory
agency interaction;
|
§
|
training
and development of client personnel;
|
§
|
research
and reduction of regulatory requirements;
and
|
§
|
engineering
plan review assistance with respect to EHS
impacts.
|
Historical
|
Pro Forma
Adjustments
(a)
|
Pro
Forma
|
CLW /
SCWW
Pro Forma
(l)
|
Pro Forma
Adjustments
(m)
|
Pro
Forma
Consolidated
(p)
|
||||||||||||||||||||
(In
thousands, except par value amounts)
|
|||||||||||||||||||||||||
ASSETS
|
|||||||||||||||||||||||||
Current
assets:
|
|||||||||||||||||||||||||
Cash
in bank
|
$
|
39,676
|
$
|
2,229,453
|
Note
2(b)
|
$
|
2,269,129
|
$
|
492,193
|
$
|
-
|
$
|
2,761,322
|
||||||||||||
Accounts
receivable, net of allowance for doubtful accounts
|
2,989,745
|
(2,989,745
|
)
|
-
|
1,331,224
|
-
|
1,331,224
|
||||||||||||||||||
Prepaid
expenses and current other assets
|
768,852
|
(768,852
|
)
|
-
|
85,361
|
-
|
85,361
|
||||||||||||||||||
Total
current assets
|
3,798,273
|
(1,529,144
|
)
|
2,269,129
|
1,908,778
|
-
|
4,177,907
|
||||||||||||||||||
Property
and equipment, net of accumulated depreciation
|
5,191,212
|
(5,091,212
|
)
|
100,000
|
10,777,655
|
5,332,999
|
16,210,654
|
||||||||||||||||||
OTHER
ASSETS
|
|||||||||||||||||||||||||
Buyer
holdback
|
-
|
1,000,000
|
1,000,000
|
-
|
-
|
1,000,000
|
|||||||||||||||||||
Restricted
cash
|
900,039
|
900,039
|
-
|
-
|
900,039
|
||||||||||||||||||||
Intangibles,
net
|
547,232
|
(547,232
|
)
|
-
|
1,486,503
|
-
|
1,486,503
|
||||||||||||||||||
Goodwill
|
84,505
|
(84,505
|
)
|
-
|
-
|
-
|
-
|
||||||||||||||||||
Deferred
financing fees
|
369,015
|
(369,015
|
)
|
-
|
162,854
|
-
|
162,854
|
||||||||||||||||||
Deposits
and other assets
|
191,686
|
(191,686
|
)
|
-
|
179,707
|
-
|
179,707
|
||||||||||||||||||
Assets
of discontinued operations
|
1,089,341
|
1,089,341
|
-
|
1,089,341
|
|||||||||||||||||||||
Total
assets
|
$
|
12,171,303
|
$
|
(6,812,794
|
)
|
$
|
5,358,509
|
$
|
14,515,497
|
$
|
5,332,999
|
$
|
25,207,005
|
Historical
|
Pro Forma
Adjustments
(a)
|
Pro
Forma
|
CLW /
SCWW
Pro Forma
(l)
|
Pro Forma
Adjustments
(m)
|
Pro
Forma
Consolidated
(p)
|
||||||||||||||||||||
(In
thousands, except par value amounts)
|
|||||||||||||||||||||||||
Liabilities and Stockholders’
Equity
|
|||||||||||||||||||||||||
Current
liabilities:
|
|||||||||||||||||||||||||
Accounts
payable
|
$
|
4,082,904
|
$
|
(2,982,903
|
)
|
Note
2
(f)
|
$
|
1,100,001
|
$
|
635,665
|
-
|
$
|
1,834,872
|
||||||||||||
Payable
to related party
|
741,719
|
(472,500
|
)
|
269,219
|
-
|
-
|
269,219
|
||||||||||||||||||
Deferred
rent
|
35,254
|
(25,000
|
)
|
10,254
|
-
|
-
|
10,254
|
||||||||||||||||||
Accrued
expenses
|
2,405,394
|
(2,405,394
|
)
|
-
|
128,233
|
-
|
128,233
|
||||||||||||||||||
Accrued
disposal costs
|
536,519
|
(536,519
|
)
|
-
|
-
|
-
|
-
|
||||||||||||||||||
Derivative
liabilities
|
4,931,579
|
(4,931,579
|
)
|
-
|
-
|
-
|
-
|
||||||||||||||||||
Deferred
incomes taxes
|
-
|
425,000
|
Note
2(e)
|
425,000
|
-
|
-
|
-
|
||||||||||||||||||
Current
portion of financing agreement
|
4,858,771
|
(4,858,771
|
)
|
-
|
-
|
-
|
-
|
||||||||||||||||||
Current
portion of long term obligations
|
-
|
-
|
-
|
716,488
|
698,908
|
1,415,396
|
|||||||||||||||||||
Current
portion of capital lease obligations
|
277,372
|
(277,372
|
)
|
Note
2(d)
|
-
|
-
|
-
|
-
|
|||||||||||||||||
Total
current liabilities
|
17,869,512
|
(16,065,038
|
)
|
1,804,474
|
1,480,386
|
698,908
|
3,983,768
|
||||||||||||||||||
LONG
– TERM LIABILITIES
|
|||||||||||||||||||||||||
Financing
agreement, net of current portion
|
$
|
8,720,557
|
$
|
(3,120,557
|
)
|
$
|
5,600,000
|
$
|
5,600,000
|
||||||||||||||||
Long
term obligations, net of current portion
|
1,758,473
|
-
|
1,758,473
|
5,536,203
|
8,304,092
|
15,598,768
|
|||||||||||||||||||
Valuation
discounts – convertible debt
|
(3,294,879
|
)
|
3,294,879
|
-
|
-
|
-
|
-
|
||||||||||||||||||
Capital
leases, net of current portion
|
734,430
|
(734,430
|
)
|
Note
2(d)
|
-
|
-
|
-
|
-
|
|||||||||||||||||
Deferred
Income Taxes
|
-
|
-
|
-
|
2,659,932
|
(2,659,932
|
)
|
-
|
||||||||||||||||||
Total
long – term liabilities
|
7,918,581
|
(560,108
|
)
|
7,358,473
|
8,196,135
|
5,644,160
|
21,198,768
|
||||||||||||||||||
Stockholders’
equity (deficiency)
|
|||||||||||||||||||||||||
Stockholders’
equity
|
$
|
14,570
|
$
|
-
|
$
|
14,570
|
$
|
-
|
$
|
-
|
$
|
14,570
|
|||||||||||||
Additional
paid-in capital
|
54,450,995
|
(2,425,895
|
)
|
Note
2(k)
|
52,025,100
|
4,946,236
|
(4,841,236
|
)
|
52,130,100
|
||||||||||||||||
Accumulated
deficit
|
(68,082,355
|
)
|
1,662,890
|
(66,419,465
|
)
|
-
|
-
|
(66,419,465
|
)
|
||||||||||||||||
Current
income
|
-
|
10,575,357
|
10,575,357
|
(107,260
|
)
|
3,831,167
|
Note
2(q)
|
14,299,264
|
|||||||||||||||||
Total
stockholders’ equity
|
(13,616,790
|
)
|
9,812,352
|
Note
2(c)
|
(3,804,438
|
)
|
4,838,976
|
(1,010,069
|
)
|
24,469
|
|||||||||||||||
Total
liabilities and stockholders’ equity (deficiency)
|
$
|
12,171,303
|
$
|
(6,812,794
|
)
|
$
|
5,358,509
|
$
|
14,515,497
|
$
|
5,332,999
|
$
|
25,207,005
|
GEM
Nevada
Historical
(a)
|
GEM
Pro Forma
Adjustments
(a)
|
Adjusted
Consolidated
Pro
Forma
|
CLW
/ SCWW
Pro Forma
(l)
|
Pro Forma
Adjustments
(m)
|
Pro
Forma
Consolidated
(p)
|
|||||||||||||||||||
(In
thousands, except par value amounts)
|
||||||||||||||||||||||||
Revenue
|
$
|
12,589,161
|
$
|
(12,589,161
|
)
|
$
|
$
|
5,291,866
|
$
|
$
|
5,291,866
|
|||||||||||||
Cost
of revenue
|
12,906,589
|
(12,906,589
|
)
|
Note
2(h)
|
-
|
3,650,472
|
62,671
|
Note
2
(n)
|
3,713,143
|
|||||||||||||||
Gross
profit
|
(317,428
|
)
|
317,428
|
-
|
1,641,394
|
(62,671
|
)
|
1,578,723
|
||||||||||||||||
Operating
expenses
|
6,607,657
|
(1,923,891
|
)
|
Note
2(h)
|
4,683,766
|
Note
2
(g)
|
988,259
|
-
|
5,672,025
|
|||||||||||||||
Loss
on sale of property
|
-
|
-
|
-
|
305,129
|
305,129
|
|||||||||||||||||||
Operating
gain (loss)
|
(6,925,085
|
)
|
2,241,319
|
(4,683,766
|
)
|
348,006
|
(62,671
|
)
|
(4,398,431
|
)
|
||||||||||||||
Other
Income (Expense):
|
||||||||||||||||||||||||
Interest
income
|
19,403
|
-
|
19,403
|
414
|
-
|
19,817
|
||||||||||||||||||
Interest
and financing costs
|
(3,724,968
|
)
|
(5,579,337
|
)
|
Note
2
(j)
|
(9,304,305
|
)
|
(379,486
|
)
|
(342,821)
|
Note
2
(o)
|
(10,026,612
|
)
|
|||||||||||
Gain
(loss) on disposal of fixed assets
|
66,050
|
-
|
66,050
|
-
|
)
|
-
|
66,050
|
|||||||||||||||||
Gain
(loss) on derivative financial instruments
|
988,342
|
4,931,579
|
Note
2
(i)
|
5,919,921
|
-
|
-
|
5,919,921
|
|||||||||||||||||
Loss
on extinguishment of debt
|
(4,039,358
|
)
|
-
|
(4,039,358
|
)
|
-
|
-
|
(4,039,358
|
)
|
|||||||||||||||
Other
non- operating income
|
27,758
|
-
|
27,758
|
60
|
-
|
27,818
|
||||||||||||||||||
Net
Loss
|
(13,587,858
|
)
|
1,593,561
|
(11,994,297
|
)
|
(31,006
|
)
|
(405,492
|
)
|
(12,430,795
|
)
|
|||||||||||||
Loss
per common share, basic and diluted:
|
(1.02)
|
(.90)
|
(.93)
|
|||||||||||||||||||||
Weighted
average shares of common stock
outstanding,
basic and diluted
|
13,348,530
|
13,348,530
|
13,348,530
|
GEM
Nevada
Historical
(a)
|
GEM
Pro Forma
Adjustments
(a)
|
Adjusted
Consolidated
Pro
Forma
|
CLW /
SCWW
Pro Forma
(l)
|
Pro Forma
Adjustments
(m)
|
Pro
Forma
Consolidated
(p)
|
||||||||||||||||||||
(In
thousands, except par value amounts)
|
|||||||||||||||||||||||||
Revenue
|
$
|
25,481,220
|
$
|
(25,481,220
|
)
|
$
|
$
|
4,581,722
|
$
|
$
|
4,581,722
|
||||||||||||||
Cost
of revenue
|
20,669,444
|
(20,669,444
|
)
|
Note
2
(h)
|
-
|
3,170,382
|
75,204
|
Note
2(n)
|
3,245,586
|
||||||||||||||||
Gross
profit
|
4,811,776
|
(4,811,776
|
)
|
-
|
1,411,340
|
(75,204
|
)
|
1,336,136
|
|||||||||||||||||
Operating
expenses
|
12,105,418
|
(3,890,481
|
)
|
Note
2
(h)
|
8,214,937
|
Note
2(g)
|
453,228
|
-
|
8,668,165
|
||||||||||||||||
Operating
gain (loss)
|
(7,293,642
|
)
|
(921,295
|
)
|
(8,214,937
|
)
|
958,112
|
(75,204
|
)
|
(7,332,029
|
)
|
||||||||||||||
Other
Income (Expense):
|
|||||||||||||||||||||||||
Interest
income
|
39,667
|
(39,667
|
)
|
-
|
10,076
|
-
|
10,076
|
||||||||||||||||||
Interest
and financing costs
|
(2,475,529
|
)
|
2,475,529
|
Note
2
(j)
|
-
|
(614,794
|
)
|
(457,094
|
)
|
Note
2
(o)
|
(1,071,888
|
)
|
|||||||||||||
Gain
(loss) on disposal of fixed assets
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||
Gain
(loss) on derivative financial instruments
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||
Costs
to induce conversion of related party debt
|
(6,797,639
|
)
|
6,797,639
|
-
|
-
|
-
|
-
|
||||||||||||||||||
Other
non- operating income
|
148,890
|
(148,890
|
)
|
-
|
27,381
|
-
|
27,381
|
||||||||||||||||||
Net
Loss
|
(16,378,253
|
)
|
8,163,316
|
(8,214,937
|
)
|
380,775
|
(532,298)
|
(8,366,460
|
)
|
||||||||||||||||
Loss
per common share, basic and diluted:
|
(1.58
|
)
|
(.79
|
)
|
(.81
|
)
|
|||||||||||||||||||
Weighted
average shares of common stock
outstanding,
basic and diluted
|
10,360,712
|
10,360,712
|
10,360,712
|
GEM
Nevada
Historical
(a)
|
GEM
Pro Forma
Adjustments
(a)
|
Adjusted
Consolidated
Pro
Forma
|
CLW
/ SCWW
Pro Forma
(l)
|
Pro Forma
Adjustments
(m)
|
Pro
Forma
Consolidated
(p)
|
||||||||||||||||||||
(In thousands, except par value amounts) | |||||||||||||||||||||||||
Revenue
|
$
|
25,481,220
|
$
|
(25,481,220
|
)
|
$
|
$
|
4,581,722
|
$
|
$
|
4,581,722
|
||||||||||||||
Cost
of revenue
|
20,669,444
|
(20,669,444
|
)
|
Note
2
(h)
|
-
|
3,170,382
|
75,204
|
Note
2
(n)
|
3,245,586
|
||||||||||||||||
Gross
profit
|
4,811,776
|
(4,811,776
|
)
|
-
|
1,411,340
|
(75,204
|
)
|
1,336,136
|
|||||||||||||||||
Operating
expenses
|
12,105,418
|
(3,890,481
|
)
|
Note
2
(h)
|
8,214,937
|
Note
2
(g)
|
453,228
|
-
|
8,668,165
|
||||||||||||||||
Operating
gain (loss)
|
(7,293,642
|
)
|
(921,295
|
)
|
(8,214,937
|
)
|
958,112
|
(75,204
|
)
|
(7,332,029
|
)
|
||||||||||||||
Other
Income (Expense):
|
|||||||||||||||||||||||||
Interest
income
|
39,667
|
(39,667
|
)
|
-
|
10,076
|
-
|
10,076
|
||||||||||||||||||
Interest
and financing costs
|
(2,475,529
|
)
|
2,475,529
|
Note
2
(j)
|
-
|
(614,794
|
)
|
(457,094
|
)
|
Note
2
(o)
|
(1,071,888
|
)
|
|||||||||||||
Gain
(loss) on disposal of fixed assets
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||
Gain
(loss) on derivative financial instruments
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||
Costs
to induce conversion of related party debt
|
(6,797,639
|
)
|
6,797,639
|
-
|
-
|
-
|
-
|
||||||||||||||||||
Other
non- operating income
|
148,890
|
(148,890
|
)
|
-
|
27,381
|
-
|
27,381
|
||||||||||||||||||
Net
Loss
|
(16,378,253
|
)
|
8,163,316
|
(8,214,937
|
)
|
380,775
|
(532,298)
|
(8,366,460
|
)
|
||||||||||||||||
Loss
per common share, basic and diluted:
|
(1.58
|
)
|
(.79
|
)
|
(.81
|
)
|
|||||||||||||||||||
Weighted
average shares of common stock
outstanding,
basic and diluted
|
10,360,712
|
10,360,712
|
10,360,712
|
(a)
|
GEM
Historical excludes the operations of GEM Mobile Treatment Services that
has been classified as a discontinued operation due to its sale in August
2009. The pro forma adjustments include the sale to the Buyer of 100% of
the Company’s stock in its wholly owned subsidiary, GEM DE and the
resulting entries from the retirement of term debt and convertible debt
with the Company’s senior lender.
|
(b)
|
Cash
proceeds from the sale ($2.254 million) are $14.0 million less $2.167
million which is the estimated amount needed to fund the working capital
deficit related to the companies being sold, $7.979 million which is the
estimated reduction of senior debt and a $0.5 million payment to the
senior lender upon sale of GEM DE, $0.1 million for transaction costs and
$1 million being held by Buyer for estimated income tax liabilities
resulting from the sale ($0.425 million) and potential contingencies post
sale ($0.575 million). The $1 million buyer holdback will be returned to
the Company at the end of one year if no liabilities are identified. The
adjustment of $2.23 million consists of the estimated net cash proceeds of
$2.254 million less $0.024 million transferred to Buyer with the assets
and liabilities of GEM DE. For purposes of these unaudited pro
forma financial statements, Buyer is assumed to have made a
$14.0 million payment at
closing.
|
|
|
(c)
|
The
adjustment of $9.812 million includes the transfer to Buyer of assets and
liabilities with a net book value of $2.735 million as of
September 30, 2009, the conversion of $1.972 million of long term
debt into equity of the Company and an estimated gain on sale of GEM
Delaware of $10.575 million. The gain on sale of $10.575
million consists of the proceeds of $14.0 million less the reduction of
senior debt deferred fees and valuation discounts related to the senior
debt ($3.664 million), a gain on derivative liabilities related to the
retirement of the senior convertible debt ($4.932 million), a payment to
the senior lender in common stock ($1.5 million) and cash ($.5 million)
upon the sale of GEM Delaware, estimated taxes ($.425 million), estimated
transaction costs ($.1 million) and funding the working capital deficit at
closing as required in the purchase agreement ($2.167
million). The funding of the working capital deficit could vary
based on the performance of GEM Delaware up to the date of
closing. Based on recent results, management believes that this
adjustment is fairly estimated in the proforma statements. If
the estimate of the working capital deficit increases to $2.709 million,
an increase of 25%, the Company would still realize a gain of $10.033
million and estimated net cash proceeds of $1.712
million.
|
(d)
|
The
sale includes the transfer to Buyer of $1,011,802 of long term lease
obligations as of September 30,
2009.
|
|
|
(e)
|
The
estimated tax liability on the gain on the sale, calculated at the federal
alternative minimum tax rate and California regular income tax rate is
$425,000 as of September 30,
2009.
|
|
|
(f)
|
Transaction
costs related to the asset sale consist of legal fees, accounting fees and
proxy costs.
|
|
|
(g)
|
The
operating expenses remaining consist of corporate costs such as salaries,
legal, professional, consulting and stock compensation
costs.
|
(h)
|
The
revenues and expenses related to the assets sold to and liabilities
assumed by Buyer.
|
(i)
|
Proceeds
from the sale will be used to retire convertible debt held by the
Company’s senior lender. This retirement generates a gain on
derivative financial instruments at September 30, 2009 of
$4,931,579.
|
(j)
|
The
amended agreement with our senior lender also provides that in the event
that and at such time as the Company or any of its subsidiaries or
stockholders enters into a binding agreement with respect to any sale of
all or any material portion of the Company’s assets or the sale of a
majority of the outstanding capital stock or (if sooner) on that date
which is thirty (30) days prior to any payment or required payment in full
of the outstanding obligations to the senior lender, the senior lender
shall have the right and option, exercisable effective at any time upon or
after the consummation of such sale or payment, or upon and after the
occurrence, to require the Company to redeem and purchase any or all
warrant shares or rights to purchase warrant shares hereunder, for a cash
purchase price of $0.75 per warrant share. This value of the
warrant shares ( $2,025,000) to be put to the Company has been included in
interest expense for these pro forma statements at September 30,
2009.
Valuation discounts ($3,294,879) computed in connection with the initial
financing with the senior lender in 2008 and later modified as a result of
amendments to the debt have been charged to interest expense for these pro
forma statements at September 30, 2009.
Deferred financing
fees ($369,015) computed in connection with the initial financing with the
senior lender in 2008 and later modified as a result of amendments to the
debt have been charged to interest expense for these pro forma statements
at September 30, 2009.
|
(k)
|
Company
employees that go to work for Buyer or otherwise leave the Company after
the sale closes have 90 days to exercise vested stock options. There are
no stock options that become fully vested as a result of the
Sale. To the extent that employees exercise stock options and
sell the acquired common stock within one year, the Company will receive
an income tax deduction for the amount of the gain realized by the
employee. No pro forma adjustments have been have been included in
unaudited pro forma consolidated balance sheet because the pro forma
amounts would be speculative.
|
(l)
|
The
following sets out the balance sheet as of October 31, 2009 and the
operating results for the ten months ended October 31, 2009, the fiscal
years ended December 31, 2008 and 2007 for California Living Waters Inc.,
(“CLW”) and its wholly owned subsidiary, Santa Clara Waste Water Company,
(“SCWW”). The ten months’ operating results for CLW added to
the nine months’ results for the Company are representative on a pro forma
basis of the operating performance of the combined
companies.
|
|
|
(m)
|
The
following sets out the pro forma adjustments had the acquisition of CLW
occurred as of January 1, 2009, January 1, 2008 and January 1,
2007.
|
(n)
|
The
additional expense classified to Cost of Revenue includes additional
depreciation related to the allocation of purchase price over the net
assets acquired to fixed assets.
|
(o)
|
Additional
interest expense related to long term debt issued in conjunction with the
purchase of California Living
Waters.
|
(p)
|
The
following sets out the pro forma balance sheet and the pro forma operating
results for the Company and its wholly owned subsidiary, CLW after the
sale of its wholly owned subsidiary, GEM
DE.
|
(q)
|
Acquisition
adjustment related to deferred income
taxes.
|
September 30,
2009
|
||||
Gross
proceeds from asset sale
|
$
|
14,000
|
||
Transaction
costs
|
(100
|
)
|
||
Debt
reduction and payments to senior lender
|
(8,479
|
)
|
||
Funding
of Working Capital deficit
|
(2,167
|
)
|
||
Income
taxes
|
(425
|
)
|
||
Buyer
holdbacks for estimated contingencies
|
(575
|
)
|
Estimated
net cash proceeds
|
$
|
2,254
|
Period
2009
|
High
|
Low
|
2009
First Quarter
|
0.75
|
0.55
|
2009
Second Quarter
|
0.99
|
0.35
|
2009
Third Quarter
|
0.90
|
0.30
|
Period
2008
|
High
|
Low
|
2008
First Quarter
|
1.99
|
1.31
|
2008
Second Quarter
|
1.99
|
1.02
|
2008
Third Quarter
|
1.15
|
0.88
|
2008
Fourth Quarter
|
1.05
|
0.32
|
Period
2007
|
High
|
Low
|
2007
First Quarter
|
2.88
|
1.80
|
2007
Second Quarter
|
3.60
|
1.86
|
2007
Third Quarter
|
3.15
|
2.50
|
2007
Fourth Quarter
|
2.90
|
1.51
|
Common
Stock
Closing
Price
|
||||
December
1, 2009
|
$
|
0.34
|
||
$
|
|
No.
of
|
||
Shares
|
%
of Stock
|
||
Name
and Address
|
owned
|
Outstanding
(1)
|
|
Kevin
P. O’Connell (2)
|
|||
660
Newport Center Drive, Suite 720
|
1,576,733
|
(3)
|
10.83%
|
Newport
Beach, CA 92660
|
|||
Timothy
J. Koziol
|
|
||
3191
Temple Ave., Suite 250
|
1,435,623
|
(4)
|
9.86%
|
Pomona
CA 91768
|
|||
Douglas
B. Edwards
|
|
||
3191
Temple Ave., Suite 250
|
284,750
|
(5)
|
1.96%
|
Pomona
CA 91768
|
|||
James
Stapleton
|
|
||
3191
Temple Ave., Suite 250
|
114,392
|
(6)
|
0.79%
|
Pomona
CA 91768
|
|||
Brett
M. Clark
|
|||
3191
Temple Ave., Suite 250
|
1,169,163
|
(7)
|
8.03%
|
Pomona
CA 91768
|
|||
William
James Mitzel
|
|||
3191
Temple Ave., Suite 250
|
446,875
|
(8)
|
3.07%
|
Pomona
CA 91768
|
|||
Laurus
Capital Management, LLC
|
|||
825
Third Avenue, 14th Floor
|
1,099,994
|
(9)
|
7.56%
|
New
York, NY 10022
|
|
||
CVC
California LLC
|
|||
525
Okeechobee Blvd., Suite 1050
|
4,804,900
|
(10)
|
33.01%
|
West
Palm Beach, FL 33401
|
|||
Directors
and Officers as a Group
|
3,450,803
|
23.70%
|
(1)
Based upon 12,691,409 shares outstanding.
|
(2)
Kevin P. O’Connell is the Managing Member of Billington Brown
Acceptance, LLC, Revete MAK, LLC, Lapis Solutions, LLC and General Pacific
Partners, LLC.
|
(3)
Includes 1,374,475 warrants to purchase common stock at $0.60,
168,250 warrants to purchase common stock at $1.19, and 26,250 warrants to
purchase common stock at $1.05.
|
(4)
Includes 703,125 options to purchase common stock at $1.19 per
share, 18,746 options to purchase common stock at $1.70 per share, 43,750
options to purchase common stock at $0.75 per share and 6,667
options
to purchase common stock at $30.00 per share. Includes 650,000
warrants to purchase common stock at $1.19
|
(5)
Includes 284,750 warrants to purchase common stock at $4 per
share.
|
(6)
Includes 35,000 warrants to purchase common stock at $1.19 per share
and 70,000 warrants to purchase common stock at $0.75 per
share.
|
(7)
Includes 562,500 options to purchase common stock at $1.19 per
share, 56,246 options to purchase common stock at $1.70 per share, 43,750
options to purchase common stock at $0.75 per share, and
6,667
options to purchase common stock at $39.00 per share. Includes 500,000
warrants to purchase common stock at
$1.19
|
(8)
Includes 328,125 options to purchase common stock at $1.19 per
share, 75,000 options to purchase common stock at $1.70 per share and
43,750 options to purchase common stock at $0.75 per
share.
|
(9)
Laurus Capital Management, LLC, a Delaware limited liability company
(“Laurus Capital”), serves as the investment manager of Laurus
Master Fund, LTD., Valens U.S. SPV I, LLC and Valens Offshore
SPV
I, LTD (together, the “Laurus Funds”) and possesses the sole power to vote
and the sole power to direst the disposition of all securities of the
Company held by Laurus Funds, which, as of the date hereof,
constitute
an aggregate of 1,099,994 shares upon exercise of warrants. Mr.
Eugene Grin and Mr. David Grin, through other entities, are the
controlling principals of Laurus Capital. Laurus Capital, Mr. Eugene
Grin
and Mr. David Grin each disclaim beneficial ownership of such shares,
except to the extent
of
its or his pecuniary interest therein, if
any.
|
(10)
Includes 1,350,000 warrants to purchase common stock at $0.60 per
share, 1,350,000 warrants to purchase common stock at $0.70 per share and
2,104,900 shares of common stock issuable on
conversion
of debt. Mr. Gary Jaggard is the controlling principal of CVC California,
LLC. Mr. Gary Jaggard disclaims beneficial ownership of such shares,
except to the extent of his pecuniary interest therein, if
any.
|
|
Page | |
Report
of Independent Registered Public Accounting Firm
|
108 |
Consolidated
Financial Statements
|
|
Consolidated
Balance Sheets as of December 31, 2008 and 2007
|
109 |
Consolidated
Statements of Operations for the Years Ended December 31, 2008 and
2007
|
110 |
Consolidated
Statements of Changes in Stockholders’ Equity (Deficiency) for the Years
Ended December 31, 2008 and 2007
|
111-112 |
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2008 and
2007
|
113-114 |
Notes
to the Consolidated Financial Statements
|
115-146 |
Page | |
Financial
Statements (Unaudited)
|
|
Condensed
Consolidated Balance Sheets as of September 30, 2009
(Unaudited) and December 31, 2008
|
147-148 |
Condensed
Unaudited Consolidated Statements of Operations for the Three
Months and Nine Months ended September 30, 2009 and
2008
|
149 |
Condensed
Unaudited Consolidated Statement of Stockholders’ Deficiency for the
Nine Months Ended September 30, 2009
|
150 |
Condensed
Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2009 and 2008
|
151-152 |
Notes
to the Unaudited Condensed Consolidated Financial
Statements
|
153-176 |
/s/
Weinberg & Company, P.A.
|
||||
Weinberg
& Company, P.A.
|
||||
2008
|
2007
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
|
$ | 375,983 | $ | 954,581 | ||||
Accounts receivable, net of allowance for doubtful accounts | ||||||||
of
$174,834 and $236,781 respectively
|
6,729,743 | 6,495,736 | ||||||
Prepaid
expenses and other current assets
|
537,289 | 156,340 | ||||||
Total
Current Assets
|
7,643,015 | 7,606,657 | ||||||
Property
and Equipment – net of accumulated depreciation of
|
||||||||
$2,917,056
and $1,854,141, respectively
|
7,783,208 | 3,950,253 | ||||||
Restricted
cash
|
1,199,784 | 1,184,835 | ||||||
Intangible
assets, net
|
864,781 | 1,028,044 | ||||||
Deferred
financing fees
|
513,412 | 394,082 | ||||||
Deposits
|
291,224 | 282,070 | ||||||
Goodwill
|
946,119 | 946,119 | ||||||
TOTAL
ASSETS
|
$ | 19,241,543 | $ | 15,392,060 |
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIENCY)
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Accounts
payable
|
$ | 3,499,178 | $ | 4,314,515 | ||||
Accrued
expenses
|
2,620,224 | 2,263,519 | ||||||
Accrued
disposal costs
|
743,474 | 478,833 | ||||||
Payable
to related party
|
706,868 | 31,871 | ||||||
Deferred
rent
|
41,202 | 37,769 | ||||||
Current
portion of financing agreement
|
10,366,544
|
662,719 | ||||||
Current
portion of long term obligations
|
794,278 | 1,274,464 | ||||||
Current
portion of capital lease obligations
|
623,007 | 187,015 | ||||||
Total
Current Liabilities
|
19,394,775 | 9,250,705 | ||||||
LONG-TERM
LIABILITIES :
|
||||||||
Financing
agreements, net of current portion
|
- | 3,708,694 | ||||||
Long
term obligations, net of current portion
|
535,689 | 79,842 | ||||||
Capital
lease obligations, net of current portion
|
1,751,854 | 1,046,920 | ||||||
Convertible
Notes payable
|
489,605 | 520,208 | ||||||
Total
Long-Term Liabilities
|
2,777,148
|
5,355,664 | ||||||
STOCKHOLDERS’
EQUITY (DEFICIENCY)
|
||||||||
Common stock, $.001 par value, 1,000,000,000 shares authorized, | ||||||||
12,691,409
and 12,473,885 shares issued and outstanding
|
12,692 | 12,474 | ||||||
Additional
paid in capital
|
53,585,035 | 50,151,615 | ||||||
Accumulated
deficit
|
(56,528,107 | ) | (49,378,398 | ) | ||||
Total
Stockholders' Equity (Deficiency)
|
(2,930,380 | ) | 785,691 | |||||
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)
|
$ | 19,241,543 | $ | 15,392,060 |
For
the years ended December 31,
|
||||||||
2008
|
2007
|
|||||||
REVENUES
|
$ | 34,864,714 | $ | 30,445,608 | ||||
COST
OF REVENUES
|
28,981,325 | 23,756,677 | ||||||
GROSS
PROFIT
|
5,883,389 | 6,688,931 | ||||||
OPERATING
EXPENSES
|
8,397,355 | 13,617,277 | ||||||
OPERATING
LOSS
|
(2,513,966 | ) | (6,928,346 | ) | ||||
OTHER
INCOME (EXPENSE):
|
||||||||
Interest
income
|
17,569 | 39,667 | ||||||
Interest
and financing costs
|
(4,695,041 | ) | (2,548,609 | ) | ||||
Other
non-operating income
|
41,729 | 148,890 | ||||||
Costs
to induce conversion of related party debt
|
- | (6,797,639 | ) | |||||
NET
LOSS
|
$ | (7,149,709 | ) | $ | (16,086,037 | ) | ||
Net
loss per common share, basic and diluted
|
$ | (.57 | ) | $ | (1.55 | ) | ||
Weighted
average shares of common stock outstanding, basic and
diluted
|
12,578,104 | 10,360,712 |
Preferred
Stock
|
Additional
|
|||||||||||||||||||||||||||
Common
Stock
|
Series
B
|
Paid-in
|
Accumulated
|
|||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Total
|
||||||||||||||||||||||
Balance,
January 1, 2007
|
5,920,408 | $ | 5,920 | 2,480,500 | $ | 2,481 | $ | 33,430,095 | $ | (33,292,361 | ) | $ | 146,135 | |||||||||||||||
Issuance
of common stock for settlement of payable to related party
|
184,874 | 185 | - | - | 219,815 | - | 220,000 | |||||||||||||||||||||
Issuance
of common stock on conversion of debt
|
377,308 | 378 | - | - | 451,225 | - | 451,603 | |||||||||||||||||||||
Issuance
of common stock on conversion of preferred
stock
|
2,067,106 | 2,067 | (2,480,500 | ) | (2,481 | ) | 414 | - | - | |||||||||||||||||||
Issuance
of common stock on conversion of notes payable to related
party
|
3,278,250 | 3,278 | - | - | 8,676,411 | - | 8,679,689 | |||||||||||||||||||||
Issuance
of common stock for cash
|
1,152 | 1 | - | - | 1,887 | - | 1,888 | |||||||||||||||||||||
Issuance
of common stock pursuant to advisory agreement with related
party
|
426,500 | 427 | - | - | 507,108 | - | 507,535 | |||||||||||||||||||||
Issuance
of common stock on conversion of interest on notes payable
|
165,083 | 165 | - | - | 196,607 | - | 196,772 | |||||||||||||||||||||
Issuance
of common stock for services
|
53,104 | 53 | - | - | 98,887 | - | 98,940 | |||||||||||||||||||||
Issuance
of common stock on exercise of stock options
|
100 | - | - | - | 119 | - | 119 | |||||||||||||||||||||
Fair
value of modification of warrants terms with related
entity
|
- | - | - | - | 136,082 | - | 136,082 | |||||||||||||||||||||
Valuation
of warrants issued to related entity as inducement to convert debt to
equity
|
- | - | - | - | 2,095,904 | - | 2,095,904 | |||||||||||||||||||||
Stock
compensation cost for value of vested options
|
- | - | - | - | 1,199,301 | - | 1,199,301 | |||||||||||||||||||||
Fair
value of warrants issued in connection with advisory fee agreement with
related party
|
- | - | - | - | 357,750 | - | 357,750 | |||||||||||||||||||||
Valuation
of beneficial conversion & warrants issued in connection
with issuance of financing agreement
|
- | - | - | - | 1,245,209 | - | 1,245,209 | |||||||||||||||||||||
Valuation
of warrants issued in connection with conversion of debt
|
- | - | - | - | 62,163 | - | 62,163 | |||||||||||||||||||||
Valuation
of warrants issued in connection with conversion of
interest
|
- | - | - | - | 36,865 | - | 36,865 | |||||||||||||||||||||
Valuation
of warrants issued to related party in connection
with lease
|
- | - | - | - | 187,128 | - | 187,128 | |||||||||||||||||||||
Valuation
of warrants issued for consulting services
|
- | - | - | - | 1,248,645 | - | 1,248,645 | |||||||||||||||||||||
Net
loss for year 2007
|
- | - | - | - | - | (16,086,037 | ) | (16,086,037 | ) | |||||||||||||||||||
Balance,
December 31, 2007
|
12,473,885 | 12,474 | - | - | 50,151,615 | (49,378,398 | ) | 785,691 |
Preferred
Stock
|
Additional
|
|||||||||||||||||||||||||||
Common
Stock
|
Series
B
|
Paid-in
|
Accumulated
|
|||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Total
|
||||||||||||||||||||||
Issuance
of stock to related party for extension of debt
|
200,000 | 200 | - | - | 219,800 |
-
|
220,000 | |||||||||||||||||||||
Issuance
of warrants to related party for extension of debt, financial
and advisory services
|
- | - | - | - | 459,887 |
-
|
459,887 | |||||||||||||||||||||
Fair
value of warrants issued
for financing
|
- | - | - | - | 1,674,036 |
-
|
1,674,036 | |||||||||||||||||||||
Fair value
of warrants issued for
services
|
- | - | - | - | 99,675 |
-
|
99,675 | |||||||||||||||||||||
Issuance
of stock on exercise of warrants
|
5,000 | 5 | - | - | 2,995 |
-
|
3,000 | |||||||||||||||||||||
Issuance
of common stock for services
|
12,524 | 13 | - | - | 13,137 |
-
|
13,150 | |||||||||||||||||||||
Fair
value of extension of warrants
|
- | - | - | - | 128,333 |
-
|
128,333 | |||||||||||||||||||||
Stock
compensation cost for value of vested options
|
- | - | - | - | 835,557 |
-
|
835,557 | |||||||||||||||||||||
Net
loss for year 2008
|
- | - | - | - | - |
(7,149,709)
|
(7,149,709 | ) | ||||||||||||||||||||
Balance,
December 31, 2008
|
12,691,409 | $ | 12,692 | - | $ | - | $ | 53,585,035 | $ | (56,528,107) | $ | (2,930,380 | ) |
Years Ended December
31,
|
||||||||
2008
|
2007
|
|||||||
OPERATING
ACTIVITIES
|
||||||||
Net
loss
|
$ | (7,149,709 | ) | $ | (16,086,037 | ) | ||
Adjustments
to reconcile net loss to cash
|
||||||||
used
in operating activities:
|
||||||||
Depreciation
and amortization
|
1,226,178 | 769,227 | ||||||
Amortization
of discount on notes
|
388,285 | 1,008,619 | ||||||
Fair
value of warrants issued to related party for
|
||||||||
financing
services
|
57,405 | - | ||||||
Fair
value of extension of warrants
|
128,333 | 606,475 | ||||||
Fair
value of vested options
|
835,557 | 1,199,301 | ||||||
Fair
value of shares and warrants issued for services
|
112,826 | 1,606,395 | ||||||
Costs
to induce conversion of notes payable
|
- | 6,797,641 | ||||||
Accrued
interest on notes payable
|
36,897 | 77,797 | ||||||
Amortization
of discount on convertible debt
|
2,439,863 | - | ||||||
Amortization
of deferred financing fees
|
458,259 | 264,540 | ||||||
Changes
in assets and liabilities:
|
||||||||
Accounts
Receivable
|
808,248 | (955,667 | ) | |||||
Prepaid
and other current assets
|
(159,651 | ) | 21,794 | |||||
Deposits
and restricted cash
|
159,720 | (407,995 | ) | |||||
Accounts
Payable
|
(1,376,193 | ) | 559,251 | |||||
Fair
value of warrants issued to modify debt
|
- | 279,202 | ||||||
Accrued
expenses and other liabilities
|
447,596 | 511,842 | ||||||
NET
CASH USED IN OPERATING ACTIVITIES
|
(1,586,386 | ) | (3,747,615 | ) | ||||
INVESTING
ACTIVITIES:
|
||||||||
Acquisitions,
net of cash received
|
(2,218,559 | ) | - | |||||
Additions
to property and equipment
|
(478,583 | ) | (343,254 | ) | ||||
NET
CASH USED IN INVESTING ACTIVITIES
|
(2,697,142 | ) | (343,254 | ) | ||||
FINANCING
ACTIVITIES
|
||||||||
Net
advances from
(repayment of)
Laurus notes
|
(6,413,605 | ) | 1,449,585 | |||||
Net
advances from Comvest
|
11,642,908 | - | ||||||
Payments
on deferred fees
|
(147,607 | ) | - | |||||
Payments
on notes payable
|
(1,289,964 | ) | (385,745 | ) | ||||
Issuance
of notes payable to related parties
|
472,500 | - | ||||||
Payments
on capital leases
|
(554,567 | ) | - | |||||
Repayment
of convertible notes
|
(67,500 | ) | - | |||||
Proceeds
from issuance of common stock
|
- | 1,888 | ||||||
Proceeds
from exercise of warrants
|
3,000 | 119 | ||||||
Advances
from related parties
|
59,765 | 3,360,949 | ||||||
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
3,704,930 | 4,426,796 | ||||||
INCREASE
(DECREASE) IN CASH AND CASH EQUIVALENTS
|
(578,598 | ) | 335,927 | |||||
Cash
and cash equivalents at beginning of year
|
954,581 | 618,654 | ||||||
CASH
AND CASH EQUIVALENTS AT END OF YEAR
|
$ | 375,983 | $ | 954,581 | ||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
Cash
paid for:
|
||||||||
Interest
expense
|
$ | 1,159,526 | $ | 982,015 |
Years Ended December
31,
|
||||||||
2008
|
2007
|
|||||||
SUPPLEMENTAL
DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
:
|
||||||||
Fair
value of warrants issued to related party for extension of
debt
|
$ | 222,500 | $ | - | ||||
Fair value of shares issued to related party for extension of debt | 220,000 | - | ||||||
Acquisition
of leased equipment and capital lease obligations
|
1,658,066 | - | ||||||
Valuation
of warrants allocated to deferred fees
|
179,982 | - | ||||||
Value
of warrants issued in connection with lease
|
- | 187,128 | ||||||
Conversion
of related party debt to common stock
|
- | 3,933,861 | ||||||
Conversion
of investor interest to common stock
|
- | 196,772 | ||||||
Conversion
of fees due to related party to common stock
|
- | 220,000 | ||||||
Issuance
of note payable on acquisition
|
1,250,000 | - | ||||||
Issuance
of capital lease obligations
|
- | 1,294,363 | ||||||
Value
of warrants and beneficial conversion feature on notes
|
1,674,035 | 1,245,209 | ||||||
Closing
fees due to related party included as deferred financing
fees
|
250,000 | - | ||||||
Issuance
of common stock for accrued expenses
|
- | 451,602 |
Transportation
|
5
Years
|
Equipment
|
5 –
7 Years
|
Furniture
and fixtures
|
5 –
7 Years
|
Building
and Improvements
|
20
- 40 Years
|
2008
|
2007
|
|||||||
Risk
free rate of return
|
4.78 | % | 4.78 | % | ||||
Option
lives in years
|
8.0 | 8.0 | ||||||
Annual
volatility of stock price
|
33.17 | % | 83.5 | % | ||||
Dividend
yield
|
-- | % | -- | % |
Current
assets and liabilities
|
$ | 809,339 | ||
Property
and Equipment
|
2,759,220 | |||
Total
|
$ | 3,568,559 |
Pro
Forma
(Unaudited)
Years
ended December 31,
|
||||||||
2008
|
2007
|
|||||||
Net
sales
|
$ | 42,162,233 | $ | 38,154,055 | ||||
Cost
of sales
|
33,514,560 | 28,436,331 | ||||||
Gross
profit
|
8,647,673 | 9,717,724 | ||||||
Operating
expenses
|
12,457,460 | 16,429,236 | ||||||
Operating
loss
|
(3,809,787 | ) | (6,711,512 | ) | ||||
Other
income (expense):
|
||||||||
Interest
income
|
54,597 | 97,277 | ||||||
Interest
expense and amortization of deferred financing costs
|
(4,701,849 | ) | (2,548,609 | ) | ||||
Cash
to induce conversion of related party debt
|
- | (6,797,639 | ) | |||||
Other
non-operating income
|
119,744 | 112,333 | ||||||
Net
Loss
|
$ | (8,337,295 | ) | $ | (15,848,150 | ) | ||
Loss
per weighted average share, basic and diluted
|
$ | (.66 | ) | $ | (1.53 | ) |
2008
|
2007
|
|||||||
Land
|
$ | 905,000 | $ | 905,000 | ||||
Building
and improvements
|
1,140,656 | 1,074,642 | ||||||
Vehicles
|
2,687,128 | 849,783 | ||||||
Equipment
and furniture
|
411,064 | 369,218 | ||||||
Warehouse
equipment
|
5,277,892 | 2,561,858 | ||||||
Leasehold
improvements
|
242,678 | 8,047 | ||||||
Asset
retirement obligations
|
35,846 | 35,846 | ||||||
10,700,264 | 5,804,394 | |||||||
Less
accumulated depreciation and amortization
|
2,917,056 | 1,854,141 | ||||||
Property
and equipment net of accumulated depreciation and
amortization
|
$ | 7,783,208 | $ | 3,950,253 |
2008
|
2007
|
|||||||
Rancho
Cordova – permits
|
$ | 475,614 | $ | 475,659 | ||||
Prime
acquisition – customers
|
400,422 | 400,422 | ||||||
K2M
Acquisition – customers
|
438,904 | 438,904 | ||||||
K2M
Acquisition – permits
|
27,090 | 27,090 | ||||||
Total
Cost
|
1,342,030 | 1,342,075 | ||||||
Accumulated
amortization
|
(477,249 | ) | (314,031 | ) | ||||
$ | 864,781 | $ | 1,028,044 |
Year
Ended December 31,
|
Amount
|
||
2009
|
$ |
163,218
|
|
2010
|
163,218 | ||
2011
|
163,218 | ||
2012
|
13,398 | ||
2013
|
13,398 | ||
Thereafter
|
348,331 | ||
$ | 864,781 |
2008
|
2007
|
|||||||
Goodwill
– Prime Acquisition
|
$ | 84,505 | $ | 84,505 | ||||
Goodwill
– K2M Acquisition
|
861,614 | 861,614 | ||||||
$ | 946,119 | $ | 946,119 |
2008 | 2007 | |||||||
Notes
from GPP
|
$ | 472,500 | $ | - | ||||
Financing
Fees
|
250,000 | - | ||||||
Accrued
Interest
|
93,692 | 31,871 | ||||||
Valuation
Discount
|
(109,324 | ) | - | |||||
$ | 706,868 | $ | 31,871 |
December
31,
|
December
31,
|
|||||||
2008
|
2007
|
|||||||
(a)
Secured notes from Laurus and affiliated entities
|
$ | - | $ | 6,413,605 | ||||
(b)
Secured Notes from CVC California
|
13,547,909 | - | ||||||
Valuation
Discount
|
(3,181,365 | ) | (2,042,192 | ) | ||||
10,366,544 | 4,371,413 | |||||||
Less
current portion
|
(10,366,544 | ) | (662,719 | ) | ||||
Financing
agreement, net of current portion
|
$ | 0 | $ | 3,708,694 |
Year
Ended December 31,
|
Amount
|
|||
2009
|
$ | 13,547,909 | ||
2010
|
- | |||
2011
|
- | |||
Total
|
$ | 13,547,909 |
December
31,
2008
|
December
31,
2007
|
|||||||
(a)
Vehicle note
|
$ | 12,865 | $ | 22,303 | ||||
(b)
Notes Payable, Alliance
|
- | 1,250,000 | ||||||
(c)
Equipment notes
|
67,102 | 97,628 | ||||||
(d)
Notes Payable, Island Acquisition
|
1,250,000 | - | ||||||
1,329,967 | 1,369,931 | |||||||
Loan
Discount
|
- | (15,625 | ) | |||||
1,329,967 | 1,354,306 | |||||||
Less
current portion
|
794,278 | 1,274,464 | ||||||
Notes
payable, net of current portion
|
$ | 535,689 | $ | 79,842 |
Year
Ended December 31,
|
Amount
|
|||
2009
|
$ | 794,278 | ||
2010
|
35,689 | |||
2011 | 500,000 | |||
|
$ | 1,329,967 |
Years
Ending December 31,
|
Amount
|
|||
2009
|
$ | 893,149 | ||
2010
|
723,857 | |||
2011
|
679,137 | |||
2012
|
571,962 | |||
2013
|
193,361 | |||
Thereafter
|
56,274 | |||
Total
payments
|
3,117,740 | |||
Less:
amount representing interest
|
(742,879 | ) | ||
Present
value of minimum lease payments
|
2,374,861 | |||
Less:
current portion
|
(623,007 | ) | ||
Non-current
portion
|
$ | 1,751,854 |
|
Weighted
Avg.
|
|||||||
Options
|
Exercise
Price
|
|||||||
Options
outstanding, January 1, 2007
|
67,067 | $ | 28.20 | |||||
Options
granted
|
5,233,268 | 1.33 | ||||||
Options
exercised
|
(100 | ) | 1.19 | |||||
Options
cancelled
|
(300,042 | ) | 2.10 | |||||
Options,
December 31, 2007
|
5,000,193 | 1.64 | ||||||
Options
granted
|
173,000 | 1.35 | ||||||
Options
exercised
|
- | - | ||||||
Options
cancelled
|
(385,853 | ) | 1.44 | |||||
Options
outstanding, December 31, 2008
|
4,787,340 | $ | 1.65 | |||||
Options
exercisable, December 31, 2008
|
3,183,704 | $ | 1.75 |
Range
of
exercise
prices
|
Total
options
outstanding
|
Weighted
average
remaining
life
in years
|
Total
weighted
average
exercise
price
|
Options
exercisable
|
Exercisable
weighted
average
exercise
price
|
|||||||||||||||||
$ | 30.00 | 36,870 | 4.17 | $ | 30.00 | 36,115 | $ | 30.00 | ||||||||||||||
48.00 | 134 | 4.25 | 48.00 | 120 | 48.00 | |||||||||||||||||
39.00 | 9,335 | 4.50 | 39.00 | 7,936 | 39.00 | |||||||||||||||||
35.10 | 451 | 4.75 | 35.10 | 361 | 35.10 | |||||||||||||||||
25.80 | 2,501 | 5.25 | 25.80 | 1,751 | 25.80 | |||||||||||||||||
6.60 | 5,838 | 5.58 | 6.60 | 3,797 | 6.60 | |||||||||||||||||
2.50 | 328,000 | 8.83 | 2.50 | 163,988 | 2.50 | |||||||||||||||||
1.99 | 14,000 | 9.33 | 1.99 | 5,250 | 1.99 | |||||||||||||||||
1.70 | 466,000 | 9.01 | 1.70 | 255,430 | 1.70 | |||||||||||||||||
1.19 | 3,819,275 | 8.25 | 1.19 | 2,679,463 | 1.19 | |||||||||||||||||
1.10 | 63,000 | 9.83 | 1.10 | 15,750 | 1.10 | |||||||||||||||||
1.05 | 41,936 | 9.58 | 1.05 | 13,743 | 1.05 | |||||||||||||||||
$ | 1.05-$48.00 | 4,787,340 | 8.36 | $ | 1.65 | 3,183,704 | $ | 1.75 |
Warrants
|
Range
of
Exercise
Prices
|
Intrinsic
Value
|
||||||||||
Warrants
outstanding, January 1, 2007
|
1,183,989
|
$
|
0.60-$120.00
|
-
|
||||||||
Warrants
granted
|
4,900,467
|
$
|
0.60-$2.75
|
-
|
||||||||
Warrants
exercised
|
-
|
-
|
-
|
|||||||||
Warrants
expired
|
(102,821
|
)
|
$
|
0.30-
$60.00
|
-
|
|||||||
Warrants
outstanding, December 31, 2007
|
5,981,635
|
$
|
0.60-$120.00
|
$
|
4,205,800
|
|||||||
Warrants
granted
|
3,762,000
|
$
|
0.60-$2.25
|
-
|
||||||||
Warrants
exercised
|
(5,000
|
)
|
0.60
|
-
|
||||||||
Warrants
expired
|
(210,741
|
)
|
$
|
1.20-$120.00
|
-
|
|||||||
Warrants
outstanding, December 31, 2008
|
9,527,894
|
$
|
0.60-$37.50
|
$
|
451,813
|
Range
of
exercise
prices
|
Total
warrants
outstanding
|
Weighted
average
remaining
life
in
years
|
Total
weighted
average
exercise
price
|
Warrants
exercisable
|
Exercisable
weighted
average
exercise
price
|
|||||||||||||||||
$ | 37.50 | 12,584 | 0.39 | $ | 37.50 | 12,584 | $ | 37.50 | ||||||||||||||
30.00 | 9,112 | 0.25 | 30.00 | 9,112 | 30.00 | |||||||||||||||||
26.10 | 125,072 | 4.17 | 26.10 | 125,072 | 26.10 | |||||||||||||||||
2.75 | 330,909 | 5.83 | 2.75 | 330,909 | 2.75 | |||||||||||||||||
2.25 | 300,000 | 5.67 | 2.25 | 300,000 | 2.25 | |||||||||||||||||
1.70 | 50,000 | 5.00 | 1.70 | 50,000 | 1.70 | |||||||||||||||||
1.38 | 661,818 | 5.83 | 1.38 | 661,818 | 1.38 | |||||||||||||||||
1.20 | 412,770 | 2.23 | 1.20 | 412,770 | 1.20 | |||||||||||||||||
1.19 | 3,072,500 | 5.42 | 1.19 | 3,072,500 | 1.19 | |||||||||||||||||
1.05 | 35,000 | 9.58 | 1.05 | 35,000 | 1.05 | |||||||||||||||||
0.60 | 4,518,129 | 4.45 | 0.60 | 4,518,129 | 0.60 | |||||||||||||||||
$ | 0.60-$37.50 | 9,527,894 | 4.86 | $ | 0.60-$37.50 | 9,527,894 | $ | 0.60-37.50 |
Year Ended December
31,
|
Amount
|
|||
2009
|
$ | 1,452,296 | ||
2010
|
1,381,358 | |||
2011
|
1,202,955 | |||
2012
|
1,014,028 | |||
2013
|
800,416 | |||
Thereafter
|
3,213,560 | |||
$ | 9,064,613 |
2008
|
2007
|
|||||||
Deferred
tax asset, net operating loss
|
$ | 14,184,661 | $ | 11,677,897 | ||||
Less
valuation allowance
|
(14,184,661 | ) | (11,677,897 | ) | ||||
Net
deferred tax asset
|
$ | - | $ | - |
2008
|
2007
|
|||||||
Tax
expense at U.S. statutory income tax rate
|
(34.0) |
%
|
(34.0) |
%
|
||||
Increase
in the valuation allowance
|
34.0 |
|
34.0 |
|
||||
Effective
rate
|
- | - |
September
30,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
(Unaudited)
|
||||||||
ASSETS
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
|
$ | 39,676 | $ | 375,983 | ||||
Accounts
receivable, net of allowance for doubtful accounts
of
$121,972 and $174,834, respectively
|
2,989,745 | 6,729,743 | ||||||
Prepaid
expenses and other current assets
|
768,852 | 537,289 | ||||||
Total
Current Assets
|
3,798,273 | 7,643,015 | ||||||
Property
and Equipment – net of accumulated depreciation
$2,761,186
and $2,917,056, respectively
|
5,191,212 | 7,783,208 | ||||||
Restricted
cash
|
900,039 | 1,199,784 | ||||||
Intangible
assets, net
|
547,232 | 864,781 | ||||||
Deferred
financing fees
|
369,015 | 513,412 | ||||||
Deposits
|
191,686 | 291,224 | ||||||
Goodwill
|
84,505 | 946,119 | ||||||
Net
assets of operations held for sale
|
1,089,341 | - | ||||||
TOTAL
ASSETS
|
$ | 12,171,303 | $ | 19,241,543 | ||||
(Continued)
|
||||||||
September
30,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
(Unaudited)
|
||||||||
LIABILITIES
AND STOCKHOLDERS’ DEFICIENCY
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Accounts
payable
|
$ | 4,082,904 | $ | 3,499,178 | ||||
Accrued
expenses
|
2,405,394 | 2,620,224 | ||||||
Accrued
disposal costs
|
536,519 | 743,474 | ||||||
Payable
to related party
|
741,719 | 706,868 | ||||||
Deferred
rent
|
35,254 | 41,202 | ||||||
Derivative
liabilities
|
4,931,579 | - | ||||||
Current
portion of financing agreement
|
4,858,771 | 10,366,544 | ||||||
Current
portion of long term obligations
|
- | 794,278 | ||||||
Current
portion of capital lease obligations
|
277,372 | 623,007 | ||||||
Liabilities
of discontinued operations
|
- | - | ||||||
Total
Current Liabilities
|
17,869,512 | 19,394,775 | ||||||
LONG-TERM
LIABILITIES :
|
||||||||
Financing
agreement, net of current portion
|
5,425,678 | - | ||||||
Long
term obligations, net of current portion
|
1,758,473 | 1,025,294 | ||||||
Capital
lease obligations, net of current portion
|
734,430 | 1,751,854 | ||||||
Total
Long-Term Liabilities
|
7,918,581 | 2,777,148 | ||||||
STOCKHOLDERS’
DEFICIENCY
|
||||||||
Common
stock, $.001 par value, 1,000,000,000 shares
authorized,
14,557,653 and 12,691,409 shares issued
and
outstanding
|
14,570 | 12,692 | ||||||
Additional
paid in capital
|
54,450,995 | 53,585,035 | ||||||
Accumulated
deficit
|
(68,082,355 | ) | (56,528,107 | ) | ||||
Total
Stockholders' Deficiency
|
(13,616,790 | ) | (2,930,380 | ) | ||||
TOTAL
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
|
$ | 12,171,303 | $ | 19,241,543 | ||||
See
accompanying notes to the condensed consolidated financial
statements.
|
Nine
months ended
|
Three months
ended
|
|||||||||||||||
September
30,
2009
|
September
30,
2008
|
September
30,
2009
|
September
30,
2008
|
|||||||||||||
REVENUES
|
$ | 12,589,161 | $ | 17,217,566 | $ | 4,046,961 | $ | 5,540,990 | ||||||||
COST
OF REVENUES
|
12,906,589 | 15,548,592 | 3,839,343 | 4,981,391 | ||||||||||||
GROSS
PROFIT (LOSS)
|
(317,428 | ) | 1,668,974 | 207,618 | 559,599 | |||||||||||
OPERATING
EXPENSES
|
6,607,657 | 5,104,099 | 2,351,196 | 1,667,630 | ||||||||||||
OPERATING
LOSS
|
(6,925,085 | ) | (3,435,125 | ) | (2,143,578 | ) | (1,108,031 | ) | ||||||||
OTHER
INCOME (EXPENSE):
|
||||||||||||||||
Interest
income
|
19,403 | 15,894 | 18,794 | 6,082 | ||||||||||||
Interest
and financing costs
|
(3,724,968 | ) | (3,655,714 | ) | (1,800,800 | ) | (2,058,799 | ) | ||||||||
Gain
on disposal of fixed assets
|
66,050 | - | - | - | ||||||||||||
Gain
on derivative financial instruments
|
988,342 | - | 2,688,452 | - | ||||||||||||
Loss
on extinguishment of debt
|
(4,039,358 | ) | - | (1,858,007 | ) | - | ||||||||||
Other
non-operating income
|
27,758 | 35,173 | 8,569 | 18,479 | ||||||||||||
LOSS
FROM CONTINUING OPERATIONS
|
(13,587,858 | ) | (7,039,772 | ) | (3,086,570 | ) | (3,142,269 | ) | ||||||||
GAIN
(LOSS) FROM DISCONTINUED OPERATIONS
|
1,077,337 | 2,351,962 | (68,561 | ) | 1,004,679 | |||||||||||
NET
LOSS
|
$ | (12,510,521 | ) | $ | (4,687,810 | ) | $ | (3,155,131 | ) | $ | (2,137,590 | ) | ||||
Loss
per common share, basic and diluted:
|
||||||||||||||||
Continuing
operations
|
$ | (1.02 | ) | $ | (.56 | ) | $ | (0.22 | ) | $ | (.25 | ) | ||||
Discontinued
operations
|
.08 | 0.19 | - | .08 | ||||||||||||
Net
loss
|
$ | (.94 | ) | $ | (.37 | ) | $ | (.22 | ) | $ | (.17 | ) | ||||
Weighted
average shares of common stock
outstanding,
basic and diluted
|
13,348,530 | 12,673,885 | 14,283,470 | 12,673,885 |
Additional
|
||||||||||||||||||||
Common
Stock
|
Paid-in
|
Accumulated
|
||||||||||||||||||
Shares
|
Amount
|
Capital
|
Deficit
|
Total
|
||||||||||||||||
Balance,
December 31, 2008
|
12,691,409 | $ | 12,692 | $ | 53,585,035 | $ | (56,528,107 | ) | $ | (2,930,380 | ) | |||||||||
Cumulative
effect of change in accounting principle
January
1, 2009 reclassification of embedded
feature
of
equity linked
financial
instruments
to
derivative liabilities
|
(1,674,036 | ) | 956,273 | (717,763 | ) | |||||||||||||||
Stock
compensation cost for value of vested options
|
642,843 | 642,843 | ||||||||||||||||||
Issuance
of shares on exercise of options
|
250 | 187 | 187 | |||||||||||||||||
Issuance
of shares on exercise of warrants
|
6,250 | 6 | 3,744 | 3,750 | ||||||||||||||||
Issuance
of shares on conversion of debt
|
1,009,744 | 1,022 | 639,456 | 640,478 | ||||||||||||||||
Issuance
of shares to secured lender
|
600,000 | 600 | 449,400 | 450,000 | ||||||||||||||||
Issuance
of warrants on conversion of interest
|
231,140 | 231,140 | ||||||||||||||||||
Fair
value of warrants for services
|
458,476 | 458,476 | ||||||||||||||||||
Issuance
of shares for services
|
250,000 | 250 | 114,750 | 115,000 | ||||||||||||||||
Net
loss
|
(12,510,521 | ) | (12,510,521 | ) | ||||||||||||||||
Balance,
September 30, 2009
|
14,557,653 | $ | 14,570 | $ | 54,450,995 | $ | (68,082,355 | ) | $ | (13,616,790 | ) |
Nine Months
Ended
|
||||||||
September 30,
|
||||||||
2009
|
2008
|
|||||||
OPERATING
ACTIVITIES
|
||||||||
Net
Loss
|
$ | (12,510,521 | ) | $ | (4,687,810 | ) | ||
Gain
from discontinued operations
|
(1,077,337 | ) | (2,351,962 | ) | ||||
Net
loss from continuing operations
|
(13,587,858 | ) | (7,039,772 | ) | ||||
Adjustments
to reconcile net loss to cash provided by
(used
in) operating activities
|
||||||||
Depreciation
and amortization
|
738,534 | 420,294 | ||||||
Amortization
of discount on financing agreement
|
1,657,287 | 2,141,610 | ||||||
Fair
value of vested options
|
642,843 | 634,213 | ||||||
Issuance
of shares and warrants for services
|
573,476 | 57,405 | ||||||
Amortization
of discount on notes
|
137,393 | 210,281 | ||||||
Amortization
of deferred financing fees
|
144,397 | 410,127 | ||||||
Cost
to induce conversion of debt
|
388,333 | - | ||||||
Gain
on change in derivative instruments
|
(988,342 | ) | - | |||||
Loss
on extinguishment of debt
|
4,039,358 | - | ||||||
Changes
in assets and liabilities:
|
||||||||
Accounts
Receivable
|
2,187,903 | 2,162,436 | ||||||
Prepaid
and other current assets
|
(275,303 | ) | (198,422 | ) | ||||
Deposits
and restricted cash
|
352,840 | (52,526 | ) | |||||
Accounts
Payable
|
914,314 | (1,598,916 | ) | |||||
Accrued
interest on related party notes
|
35,340 | - | ||||||
Accrued
interest on notes payable
|
224,896 | 28,141 | ||||||
Accrued
expenses and other liabilities
|
(169,057 | ) | (368,949 | ) | ||||
NET
CASH USED IN CONTINUING OPERATIONS
|
(2,983,646 | ) | (3,194,078 | ) | ||||
NET
CASH PROVIDED BY DISCONTINUED OPERATIONS
|
3,366,451 | 2,147,483 | ||||||
NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
|
382,805 | (1,046,595 | ) | |||||
INVESTING
ACTIVITIES
|
||||||||
Acquisitions,
net of cash received, and notes payable issued to seller
|
- | (2,150,000 | ) | |||||
Proceeds
from sale of property and equipment
|
30,674 | - | ||||||
Additions
to property and equipment
|
- | (76,598 | ) | |||||
NET
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES OF CONTINUING
OPERATIONS
|
30,674 | (2,226,598 | ) | |||||
NET
CASH USED IN INVESTING ACTIVITIES OF DISCONTINUED
OPERATIONS
|
(269,571 | ) | (214,348 | ) | ||||
NET
CASH USED IN INVESTING ACTIVITIES
|
(238,897 | ) | (2,440,946 | ) | ||||
FINANCING
ACTIVITIES
|
||||||||
Net
advances from notes payable – financing agreement
|
(132,581 | ) | 4,511,596 | |||||
Advances
from related parties
|
204,943 | 505,101 | ||||||
Proceeds
from exercise of options and warrants
|
3,937 | - | ||||||
Payment
for deferred financing fees
|
(147,607 | ) | ||||||
Payment
of notes payable
|
(37,500 | ) | (1,302,500 | ) | ||||
Repayment
of convertible notes
|
- | - | ||||||
Payment
on capital leases
|
(202,142 | ) | (164,631 | ) | ||||
NET
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES OF CONTINUING
OPERATIONS
|
(163,343 | ) | 3,401,959 | |||||
NET
CASH USED IN FINANCING ACTIVITIES OF DISCONTINUED
OPERATIONS
|
(316,872 | ) | (264,473 | ) | ||||
NET
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
(480,215 | ) | 3,137,486 | |||||
DECREASE IN
CASH AND CASH EQUIVALENTS
|
(336,307 | ) | (350,055 | ) | ||||
(continued)
|
Nine Months
Ended
|
||||||||
September 30,
|
||||||||
2009
|
2008
|
|||||||
Cash
at beginning of period
|
375,983 | 954,581 | ||||||
CASH
AT END OF PERIOD
|
$ | 39,676 | $ | 604,526 | ||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
Cash
paid for:
|
||||||||
Interest
Expense
|
$ | 1,075,928 | $ | 852,648 | ||||
SUPPLEMENTAL
DISCLOSURE OF NON – CASH INVESTING AND
FINANCING
ACTIVITIES:
|
||||||||
Acquisition
of leased equipment and capital lease obligations
|
$ | - | $ | 1,658,066 | ||||
Conversion
of debt to common stock
|
483,284 | - | ||||||
Issuance
of common stock to related party for extension of debt
|
- | 220,000 | ||||||
Issuance
of note payable on acquisition
|
- | 1,250,000 | ||||||
Valuation
of warrants allocated to deferred fees
|
- | 179,982 | ||||||
Fair
value of warrants and valuation discount after
modification
|
8,826,697 | - | ||||||
Fair
value of warrants issued to related party for extension of
debt
|
- | 222,500 | ||||||
Closing
fees due to related party included as deferred financing
fees
|
- | 250,000 | ||||||
Cumulative
effect of adoption of accounting principle and establishment
of
derivative liability on:
|
||||||||
Notes
payable
|
1,408,828 | - | ||||||
Stockholders’
deficiency
|
717,763 | - | ||||||
See
accompanying notes to the condensed consolidated financial
statements
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|
Fair
value of warrants
and
embedded
derivatives
|
-
|
-
|
$ 4,931,579
|
$ 4,931,579
|
Nine
months
ended
|
Three
months
ended
|
|||||||
September
30,
2008
|
September
30,
2008
|
|||||||
Net
sales
|
$ | 24,515,085 | $ | 10,038,594 | ||||
Cost
of sales
|
20,081,827 | 7,754,888 | ||||||
Gross
profit (Loss)
|
4,433,258 | 2,283,706 | ||||||
Operating
expenses
|
9,164,204 | 4,367,031 | ||||||
Operating
loss
|
(4,730,946 | ) | (2,083,325 | ) | ||||
Other
income (expense):
|
||||||||
Interest
income
|
52,922 | 28,424 | ||||||
Interest
expense and amortization of deferred financing costs
|
(3,662,522 | ) | (2,062,208 | ) | ||||
Other
non-operating income
|
113,188 | 77,929 | ||||||
Loss
from operations
|
(8,227,358 | ) | (4,039,180 | ) | ||||
Gain
(loss) from discontinued operations
|
2,351,965 | 1,004,679 | ||||||
Net
Loss
|
$ | (5,875,393 | ) | $ | (3,034,501 | ) | ||
Loss
per weighted average share, basic and diluted
|
$ | (.46 | ) | $ | (.24 | ) |
Nine
months ended
|
Three months
ended
|
|||||||||||||||
September
30,
2009
|
September
30,
2008
|
September
30,
2009
|
September
30,
2008
|
|||||||||||||
Net
sales
|
$ | 7,124,237 | $ | 7,771,644 | $ | 661,195 | $ | 3,089,985 | ||||||||
Cost
of sales
|
5,432,842 | 4,779,397 | 635,180 | 1,878,884 | ||||||||||||
Gross
profit (Loss)
|
1,691,395 | 2,992,247 | 26,015 | 1,211,101 | ||||||||||||
Operating
expenses
|
524,816 | 547,007 | 81,726 | 177,548 | ||||||||||||
Operating
profit (loss)
|
1,166,579 | 2,445,240 | (55,711 | ) | 1,033,553 | |||||||||||
Other
income (expense):
|
||||||||||||||||
Interest
income
|
151 | - | - | - | ||||||||||||
Interest
expense and financing costs
|
(89,068 | ) | (93,278 | ) | (12,850 | ) | (28,874 | ) | ||||||||
Gain
on disposal of fixed assets
|
(325 | ) | - | - | - | |||||||||||
Gain
(loss) from discontinued operations
|
$ | 1,077,337 | $ | 2,351,962 | $ | (68,561 | ) | $ | 1,004,679 |
September
30,
2009
|
December
31,
2008
|
|||||||
(Unaudited)
|
||||||||
Land
|
$ | 905,000 | $ | 905,000 | ||||
Building
and improvements
|
1,140,656 | 1,140,656 | ||||||
Vehicles
|
2,518,815 | 2,687,128 | ||||||
Equipment
and furniture
|
422,240 | 411,064 | ||||||
Warehouse
equipment
|
2,719,960 | 5,277,892 | ||||||
Leasehold
improvements
|
209,881 | 242,678 | ||||||
Asset
retirement obligations
|
35,846 | 35,846 | ||||||
7,952,398 | 10,700,264 | |||||||
Less
accumulated depreciation and amortization
|
2,761,186 | 2,917,056 | ||||||
Property
and equipment net of accumulated depreciation
and
amortization
|
$ | 5,191,212 | $ | 7,783,208 |
September
30,
2009
|
December
31,
2008
|
|||||||
(Unaudited)
|
||||||||
Rancho
Cordova acquisition – permit
|
$ | 475,614 | $ | 475,614 | ||||
Prime
acquisition – customers
|
400,422 | 400,422 | ||||||
GMTS acquisition
– customers
|
- | 438,904 | ||||||
GMTS acquisition
– permits
|
- | 27,090 | ||||||
Accumulated
amortization
|
(328,804 | ) | (477,249 | ) | ||||
$ | 547,232 | $ | 864,781 |
September
30,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
(Unaudited)
|
||||||||
Secured
Notes from CVC California
|
$ | 13,579,328 | $ | 13,547,909 | ||||
Valuation
Discount
|
(3,294,879 | ) | (3,181,365 | ) | ||||
10,284,449 | 10,366,544 | |||||||
Less
current portion
|
(4,858,771 | ) | (10,366,544 | ) | ||||
Financing
agreement, net of current portion
|
$ | 5,425,678 | $ | - |
September
30,
2009
|
December
31,
2008
|
|||||||
(Unaudited)
|
||||||||
(a)
Vehicle notes
|
$ | - | $ | 12,865 | ||||
(b)
Equipment notes
|
- | 67,102 | ||||||
(c)
Notes Payable, Island Acquisition
|
1,250,000 | 1,250,000 | ||||||
(d)
Notes Payable
|
508,473 | 489,605 | ||||||
1,758,473 | 1,819,572 | |||||||
Less
current portion
|
- | (794,278 | ) | |||||
Notes
payable, net of current portion
|
$ | 1,758,473 | $ | 1,025,294 |
Years Ending December 31, | ||||
2009
|
95,433 | |||
2010
|
376,760 | |||
2011
|
349,262 | |||
2012
|
258,970 | |||
2013
|
138,187 | |||
Thereafter
|
46,906 | |||
Total
payments
|
1,265,518 | |||
Less:
amount representing interest
|
(253,716 | ) | ||
Present
value of minimum lease payments
|
1,011,802 | |||
Less:
current portion
|
(277,372 | ) | ||
Non-current
portion
|
$ | 734,430 |
September
30,
2009
|
September
4,
2009
|
June
30,
2009
|
June
1,
2009
|
December
31,
2008
|
August
31,
2008
|
||||||
Conversion
feature:
|
|||||||||||
Risk-free
interest rate
|
.40%
|
.42%
|
1.14%
|
1.14%
|
1.66%
|
1.66%
|
|||||
Expected
volatility
|
133.39%
|
115.22%
|
88.02%
|
88.02%
|
78.66%
|
78.57%
|
|||||
Expected
life (in years)
|
0.75
|
0.83
|
2.17
|
2.25
|
2.67
|
3.00
|
|||||
Expected
dividend yield
|
0.0%
|
0.0%
|
0.0%
|
0.0%
|
0.00%
|
0.0%
|
|||||
Warrants:
|
|||||||||||
Risk-free
interest rate
|
-
|
-
|
2.66%
|
2.66%
|
4.78%
|
4.78%
|
|||||
Expected
volatility
|
-
|
-
|
88.02%
|
88.02%
|
78.66%
|
78.57%
|
|||||
Expected
life (in years)
|
-
|
-
|
5.17
|
5.25
|
5.67
|
6.00
|
|||||
Expected
dividend yield
|
-
|
-
|
0.00%
|
0.00%
|
0.00%
|
0.00%
|
|||||
Fair
Value:
|
|||||||||||
Conversion
feature
|
$2,906,579
|
$1,635,977
|
$4,779,927
|
$3,637,437
|
$624,385
|
$1,145,544
|
|||||
Warrants
|
2,025,000
|
2,025,000
|
1,912,871
|
1,528,283
|
1,502,205
|
2,113,423
|
|||||
$4,931,579
|
$3,660,977
|
$6,692,798
|
$5,165,720
|
$2,126,590
|
$3,258,967
|
Additional
|
Accumulated
|
Derivative
|
Convertible
|
|||||||||||||
Derivative
Instrument:
|
Paid-in
Capital
|
Deficit
|
Liability
|
Note
|
||||||||||||
Conversion
feature
|
$ | - | $ | 393,875 | $ | 624,385 | $ | (1,018,261 | ) | |||||||
Warrants
|
$ | (1,674,036 | ) | $ | 562,398 | $ | 1,502,205 | $ | (390,567 | ) | ||||||
$ | (1,674,036 | ) | $ | 956,273 | $ | 2,126,590 | $ | (1,408,828 | ) |
Weighted
Avg.
|
Weighted
Avg.
|
Weighted
Avg.
|
||||||||||
Options
|
Exercise
Price
|
Life
in Years
|
||||||||||
Options
outstanding, January 1, 2009
|
4,787,340 | 1.64 | 8.36 | |||||||||
Options
granted
|
604,500 | 0.75 | 9.33 | |||||||||
Options
exercised
|
(250 | ) | 0.75 | - | ||||||||
Options
cancelled
|
(786,915 | ) | 1.65 | - | ||||||||
Options
outstanding, September 30, 2009
|
4,604,675 | 1.53 | 7.78 | |||||||||
Options
exercisable, September 30, 2009
|
3,836,308 | 1.58 | 7.67 |
Range
of
exercise
prices
|
Weighted
Avg. in
Years
|
|||||||||||
Warrants
outstanding, January 1, 2009
|
9,527,894 | $ | 0.60-$37.50 | 4.86 | ||||||||
Warrants
granted
|
4,598,014 | $ | 0.01-$1.70 | 4.30 | ||||||||
Warrants
exercised
|
(6,250 | ) | $ | 0.60 | - | |||||||
Warrants
expired
|
(4,074,432 | ) | $ | 0.60-$37.50 | - | |||||||
Warrants
outstanding, September 30, 2009
|
10,045,226 | $ | 0.01-$37.50 | 4.64 |
September
30,
2009
|
December
31,
2008
|
|||||||
(Unaudited)
|
||||||||
Deferred
tax asset, net operating loss
|
$ | 18,180,198 | $ | 14,184,661 | ||||
Less
valuation allowance
|
(18,180,198 | ) | (14,184,661 | ) | ||||
Net
deferred tax asset
|
$ | - | $ | - |
Nine
months ended
September
30,
|
||||||
2009 | 2008 | |||||
Tax
expense at U.S. statutory income tax rate
|
(34.0) % | (34.0) % | ||||
Increase
in the valuation allowance
|
34.0 | 34.0 | ||||
Effective
rate
|
- | - |
Page
|
||
ARTICLE
1
|
||
GENERAL
|
2
|
|
Section
1.1
|
General
Definitions
|
2
|
Section
1.2
|
Special
Definitions Related To ERISA
|
9
|
Section
1.3
|
Special
Definitions Related to Environmental Matters
|
10
|
Section
1.4
|
Special
Definitions Related to Indemnification
|
12
|
Section
1.5
|
Usage
|
12
|
ARTICLE
2
|
||
PURCHASE
AND SALE OF PURCHASED INTERESTS
|
14
|
|
Section
2.1
|
Purchase
of Purchased Interests
|
14
|
Section
2.2
|
Purchase
Price and Payment
|
14
|
Section
2.3
|
Instruments
of Conveyance
|
14
|
Section
2.4
|
Time
and Place of Closing
|
15
|
Section
2.5
|
Net
Working Capital Adjustment of Purchase Price
|
15
|
Section
2.6
|
Further
Adjustment to Purchase Price
|
16
|
ARTICLE
3
|
||
REPRESENTATIONS
AND WARRANTIES OF THE COMPANY AND SELLER
|
18
|
|
Section
3.1
|
Organization
and Qualification
|
18
|
Section
3.2
|
Capitalization
of Company
|
18
|
Section
3.3
|
Title
to Company Shares
|
19
|
Section
3.4
|
Subsidiaries;
Partnerships; Investments
|
19
|
Section
3.5
|
Authorization
of Transaction
|
20
|
Section
3.6
|
No
Conflict of Transaction With Obligations and Laws
|
20
|
Section
3.7
|
Books
and Records; Internal Controls
|
21
|
Section
3.8
|
Financial
Statements
|
21
|
Section
3.9
|
Absence
of Undisclosed Liabilities
|
22
|
Section
3.10
|
Conduct
of Business; Absence of Certain Changes
|
22
|
Section
3.11
|
Taxes
|
24
|
Section
3.12
|
Property
|
26
|
Section
3.13
|
Collectability
of Receivables
|
29
|
Section
3.14
|
Contracts
and Commitments
|
29
|
Section
3.15
|
Labor
and Employee Relations
|
31
|
Section
3.16
|
ERISA and
Employee Benefits
|
32
|
Section
3.17
|
Intellectual
Property Rights
|
35
|
Section
3.18
|
Environmental
Matters
|
37
|
Section
3.19
|
Warranty
or Other Claims
|
39
|
Section
3.20
|
Compliance
With Legal Requirements; Governmental Authorizations
|
39
|
Section
3.21
|
Legal
Proceedings; Court Orders
|
40
|
Section
3.22
|
Borrowings
and Guarantees
|
41
|
Section
3.23
|
Financial
Service Relations and Powers of Attorney
|
41
|
Section
3.24
|
Insurance
|
42
|
Section
3.25
|
Finder’s
Fee
|
43
|
Section
3.26
|
Transactions
With Related Parties
|
43
|
Section
3.27
|
Absence
of Sensitive Payments
|
44
|
Section
3.28
|
Disclosure
of Material Information
|
44
|
Section
3.29
|
Copies
of Documents
|
45
|
Section
3.30
|
Adequacy
of Consid
eration
|
45
|
Section
3.31
|
Representations
and Warranties Regarding GEM NewCo and GEM LP
|
45
|
ARTICLE
4
|
||
REPRESENTATIONS
AND WARRANTIES OF BUYER
|
47
|
|
Section
4.1
|
Organization
of Buyer
|
47
|
Section
4.2
|
Authorization
of Transaction
|
47
|
Section
4.3
|
No
Conflict of Transaction With Obligations and Laws
|
47
|
ARTICLE
5
|
||
COVENANTS
OF THE COMPANY AND THE SELLER PRIOR TO CLOSING
|
48
|
|
Section
5.1
|
Access
to Information
|
48
|
Section
5.2
|
Affirmative
Covenants with Respect to Ordinary Course of Business
|
48
|
Section
5.3
|
Negative
Covenants with Respect to Ordinary Course of Business
|
50
|
Section
5.4
|
Governmental
Permits and Approvals; Consents
|
51
|
Section
5.5
|
Assignment
of Contracts
|
51
|
Section
5.6
|
Notification
of Breach of Representations and Warranties
|
52
|
Section
5.7
|
Consummation
of Agreement
|
52
|
Section
5.8
|
Exclusive
Dealing
|
52
|
Section
5.9
|
ERISA
Benefit Plan
|
53
|
Section
5.10
|
Welfare
Plan
|
53
|
Section
5.11
|
Formation
of GEM NewCo and GEM LP; Joinder; Merger
|
54
|
Section
5.12
|
Settlement
of Proceedings
|
54
|
Section
5.13
|
Stockholder
Meeting
|
55
|
Section
5.14
|
Payroll
and Reimbursement
|
55
|
ARTICLE
6
|
||
COVENANTS
OF BUYER PRIOR TO CLOSING
|
56
|
|
Section
6.1
|
Governmental
Permits and Approvals
|
56
|
Section
6.2
|
Consummation
of Agreement
|
56
|
ARTICLE
7
|
||
CONDITIONS
TO OBLIGATIONS OF BUYER
|
56
|
|
Section
7.1
|
Due
Diligence Review
|
56
|
Section
7.2
|
Representations;
Warranties; Covenants
|
57
|
Section
7.3
|
No
Bankruptcy
|
57
|
Section
7.4
|
Absence
of Certain Litigation
|
57
|
Section
7.5
|
Resignations
of Officers and Directors; Releases
|
57
|
Section
7.6
|
Consents
and Authorizations
|
58
|
Section
7.7
|
Certain
Actions Completed
|
58
|
Section
7.8
|
Formation
of GEM LP and GEM NewCo; Merger
|
62
|
Section
7.9
|
Execution
of Instruments of Conveyance and Additional Documents
|
63
|
Section
7.10
|
Real
Estate Matters
|
63
|
Section
7.11
|
Closing
Certificate of Company and Seller
|
64
|
Section
7.12
|
Opinion
of Seller’s Counsel
|
64
|
ARTICLE
8
|
||
CONDITIONS
TO OBLIGATIONS OF SELLER
|
65
|
|
Section
8.1
|
Representations;
Warranties; Covenants
|
65
|
Section
8.2
|
Absence
of Certain Litigation
|
65
|
ARTICLE
9
|
||
INDEMNIFICATION
|
65
|
|
Section
9.1
|
Survival;
Right To Indemnification Not Affected By Knowledge or
Materiality
|
65
|
Section
9.2
|
Indemnification
By Seller
|
66
|
Section
9.3
|
Indemnification
by Buyer
|
67
|
Section
9.4
|
Special
Indemnification Provision Regarding Environmental Matters
|
67
|
Section
9.5
|
Defense
of Third Party Actions
|
69
|
Section
9.6
|
Payment
of Indemnification
|
70
|
Section
9.7
|
Miscellaneous
|
71
|
ARTICLE
10
|
||
AGREEMENTS
AFTER CLOSING
|
71
|
|
Section
10.1
|
Further
Assurances
|
71
|
Section
10.2
|
Transition
Services
|
71
|
Section
10.3
|
Collected
Receivables. To the extent that Company collects any amounts
owing on the receivables listed on Schedule 3.13(a) after Closing, Company
shall remit such funds, less any expenses incurred in effecting such
collection, to Seller on a quarterly basis.
|
72
|
Section
10.4
|
Merger
Expenses. Buyer shall reimburse Seller for all reasonable
incurred expenses incurred by Seller or Company, as applicable, in
connection with the formation of GEM NewCo, the formation of GEM LP, and
the Merger of Company into GEM LP. Provided however, such
expenses shall not include any Taxes.
|
72
|
Section
10.5
|
Non-Compete;
Non-solicitation
|
72
|
Section
10.6
|
Customer
And Other Business Relationships
|
72
|
Section
10.7
|
Assistance
In Proceedings
|
73
|
Section
10.8
|
Retention
Of And Access To Records
|
73
|
Section
10.9
|
Use
of GEM logo
|
73
|
Section
10.10
|
Employees
and Employee Benefits
|
73
|
Section
10.11
|
Confidentiality
|
74
|
Section
10.12
|
Actions
with Respect to Closure Deposit
|
75
|
ARTICLE
11
|
||
TAX
MATTERS
|
75
|
|
Section
11.1
|
Allocation
of Tax Liabilities
|
75
|
Section
11.2
|
Tax
Characterization
|
76
|
Section
11.3
|
Allocation
of Purchase Price
|
76
|
Section
11.4
|
Cooperation
|
76
|
Section
11.5
|
Tax
Refunds
|
76
|
Section
11.6
|
Transfer
Taxes
|
76
|
ARTICLE
12
|
||
TERMINATION
OF AGREEMENT
|
77
|
|
Section
12.1
|
Termination
|
77
|
Section
12.2
|
Casualty
Loss
|
77
|
Section
12.3
|
Effect
of Termination
|
77
|
Section
12.4
|
Right
to Proceed
|
78
|
ARTICLE
13
|
||
MISCELLANEOUS
|
78
|
|
Section
13.1
|
Fees
and Expenses
|
78
|
Section
13.2
|
Notices
|
78
|
Section
13.3
|
Publicity
and Disclosures
|
79
|
Section
13.4
|
Time
Period
|
79
|
Section
13.5
|
Entire
Agreement
|
79
|
Section
13.6
|
Severability
|
80
|
Section
13.7
|
Assignability
and No Third Party Beneficiary
|
80
|
Section
13.8
|
Amendment
and Waiver
|
80
|
Section
13.9
|
Governing
Law and Jurisdiction
|
81
|
Section
13.10
|
Counterparts
|
81
|
Section
13.11
|
Effect
of Table of Contents and Headings
|
81
|
Exhibits
|
|
1.1(a)
|
Closing
Net Working Capital Calculation
|
3.31(a)
|
Form of Organizational Documents |
5.11(b)
|
Form
of Joinder Agreement
|
7.5(a)
|
Form
of Resignations of Directors and Officers
|
7.5(b)
|
Form
of Releases
|
7.7(a)(i)
|
Form
of Paydown and Release Letter
|
7.7
(a)(ii)
|
Form
of CVC Voting Agreement
|
7.7(z)
|
Form
of Management Voting Agreement
|
7.12
|
Form
of Opinion of Seller’s
Counsel
|
LUNTZ
ACQUISITION (DELAWARE), LLC
|
|
By: _____________________________
Name:
Title:
|
|
STOCKHOLDER:
|
|
______________________________________
Timothy
J. Koziol
|
STOCKHOLDER:
|
|
______________________________________
Brett
M. Clark
|
STOCKHOLDER:
|
|
______________________________________
William
J. Mitzel
|
STOCKHOLDER:
|
|
______________________________________
M.
Danae Fahey
|
STOCKHOLDER:
|
|
______________________________________
Douglas
B. Edwards
|
STOCKHOLDER:
|
|
______________________________________
James
P. Stapleton
|
Stockholder
Name
and Address
|
Common
Stock
|
Preferred
Stock
|
Options | Warrants | ||||
Timothy
J. Koziol
7552
Avila
La
Verne, CA 91750
|
13,335
|
-
|
881,667(1)
|
650,000(2)
|
||||
James
P. Stapleton
PO
Box 50066
Bellevue,
WA 98015
|
9,392
|
-
|
-
|
105,000(3)
|
||||
William
J. Mitzel
2477
Costa Del Sol
La
Verne, CA 91750
|
-
|
-
|
550,000(4)
|
-
|
||||
Brett
M. Clark
54
Ashwood
Irvine,
CA 92604
|
-
|
-
|
781,667(5)
|
500,000(6)
|
||||
Douglas
B. Edwards
4255
Harbour Island Lane
Oxnard,
CA 93035
|
-
|
-
|
-
|
284,750(7)
|
||||
M.
Danae Fahey
541
E Harvard Place
Ontario,
CA 91764
|
-
|
-
|
123,334(8)
|
-
|
|
1.
|
Includes
6,667 incentive options exercisable at $30.00; 750,000 incentive options
exercisable at $1.19; 25,000 incentive options exercisable at $1.70; and
100,000 incentive options exercisable at
$0.75.
|
|
2.
|
Includes
650,000 warrants exercisable at
$1.19.
|
|
3.
|
Includes
70,000 warrants exercisable at $0.75 and 35,000 warrants exercisable at
$1.19.
|
|
4.
|
Includes
350,000 incentive options exercisable at $1.19; 100,000 incentive options
exercisable at $1.70; and 100,000 incentive options exercisable at
$0.75.
|
|
5.
|
Includes
6,667 incentive options exercisable at $39.00; 600,000 incentive options
exercisable at $1.19; 75,000 incentive options exercisable at $1.70; and
100,000 incentive options exercisable at
$0.75.
|
|
6.
|
Includes
500,000 warrants exercisable at
$1.19.
|
|
7.
|
Includes
284,750 warrants exercisable at
$4.00.
|
|
8.
|
Includes
3,334 incentive options exercisable at $30.00; 100,000 incentive options
exercisable at $1.19; and 20,000 incentive options exercisable at
$0.75.
|
LUNTZ
ACQUISITION (DELAWARE), LLC
|
|
By: _____________________________
Name:
Title:
|
|
CVC
CALIFORNIA, LLC
|
|
By: _____________________________
Name:
Title:
|
1.
|
600,000
shares of Common Stock.
|
2.
|
Amended
and Restated Warrant (No. CV-4) to purchase 2,700,000 shares of Common
Stock at an exercise price of $.01 per share (such number of shares and
exercise price are subject to adjustment in accordance with such
warrant).
|
3.
|
Amended
and Restated Convertible Term Note dated September 4, 2009 in the
principal amount of $6,314,699.59, convertible into Common Stock at a
conversion price of $.60 per share (subject to adjustment in accordance
with such note).
|
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